Pretty sure I don't need to do traditional IRA conversion to Roth to take advantage of this because simple distributions from a traditional IRA count as ordinary income - but this is where some of the confusion starts to pop up.

To figure modified adjusted gross income, combine all the amounts used to figure adjusted gross income except don’t take into account:Passive income or loss included on Form 8582,Any rental real estate loss allowed to real estate professionals (defined under Activities That Are Not Passive Activities, earlier),Any overall loss from a PTP, The taxable amount of social security and tier 1 railroad retirement benefits, (some guidance has taxable IRA - Added by JL)Deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans,The domestic production activities deduction, The deduction allowed for the deductible part of self-employment taxes,The exclusion from income of interest from series EE and I U.S. savings bonds used to pay higher education expenses, The exclusion of amounts received under an employer's adoption assistance program, orThe student loan interest deduction.So essentially start with AGI and reverse the above.

I have enough for down payment and credit score is pretty good too, but some of the traditional morgrage lenders look for past 2 years of income for self employed people-my 2017 was good but 2016 was low as i turned self employed during the middle of that year.

As @Christian Manhard mentioned as soon as you break the surface is when the issues would arise.

Income is a factor; a really high income in work may push one to a traditional.

Should they open a traditional IRA and do a IRA to ROTH IRA transfer to avoid running into this scenario now or in the near future?

I'm just a property owner looking to deal with an operator, just collecting my rent.Can anyone tell me what are the things which are different compared to the traditional residential lease in California?

The area is surrounded by other traditional multi-family.

Most stocks, bonds, equities, etc are assets held for the production of income, and are not trade or business assets.On the other hand, traditional, long-term rental real estate is "per se" (read: intrinsically & immutably) passive under tax law. 

I do not have enough cash to make an all cash offer, and don't believe that we would qualify for traditional financing (though will look into whether we might if we apply in my husband's name alone).