The house wasn't perfect; it had a small yard and was farther from city center but everything else was so pretty!

might be a perfect candidate for some sort of short plat. 

Two pounds of sugar down the gas tank at night.  

Especially when you start to rent out the units, you'll have a hard time choosing tenants as you look for the perfect one, etc.

It's probably worth your while to e-mail them some current pics of the damage as they will likely be surprised it's not in perfect shape, especially if they've relied on tenants to keep the place up and don't use a PM. 

If it’s in an area going up in value, that you enjoy, I say it “counts” in your investing goals, even if it’s not a perfect house hack duplex deal, you took courage and bought SOMETHING and refused to rent the rest of your life.  

In a perfect world (which could happen), lets say we get the borrower to make 12 consecutive payments at $204/month with his loan balance being $14,000.

You can have the perfect plan, but if you can't execute it, it's worthless.

In the end we updated all electric, all plumbing above basement level, new hot water tank, all new windows, removed a divider wall, installed a 1/2 bath, upgraded laundry to the second floor, full kitchen remodel, full bath remodel, and installed a rear exterior door to the back yard.

I think you concerns are perfectly valid and it would not be for me.