It seems foolish to do something like this but where else can I get cash Flow; I understand appreciation is probably good no to be limited to none.

You want to make it very easy for the tenants to renew early (limits their leverage) and inconvenient to leave.  

They pay power at ____ monthly and when they move in if water useage increases more than a minor amount I adjust their utility payment.

As long as the roof, doors, and lights (if you have a powered garage) work than you're good to go. 

Given the FHA limit of 468k, I am hoping I will end up with about 100k for renovation. 15% of this reno cost would be set aside as contingency fund to comply with FHA reno regulations.

However, you need to consider that over time taxes and insurance do go up, so if the margins are very thin in its present state with limited expected rental growth it might not be a viable deal. 

But remember,  if you have overall loss, the loss is limited unless you are RE pro. 

Maybe it will be to pull equity out and to go out of state, maybe it will to try and house hack, maybe it will be to pull money out and invest in a syndication... the sky is the limit when you have a free property that has as much equity as you.  

Just sounds like a lot to deal with on such a small property with limited upside potential.

The general consensus among those of us hashing it out, though, is that if he wants to use his VA entitlement, his options are to either 1) use it up to his limit and then get a 2nd mortgage to cover as much of the remainder as possible 2) OR to use his VA over the prescribed entitlement in which case he will have to come up with 25% of the difference between his entitlement and the purchase price.