I’m ready to start house hacking so I can attempt to turn this liability into an asset, or close to it!

What you can do is fully expense any remaining depreciation on the old air conditioner that was removed, and since that's a retired asset there's no recapture. 

I’m happy to help you through the legal side of things, such as setting up the best entity structure for your goals, and the actual real estate nuances of the law.

Get your tenant to explore NON- FHA options like 99% ltv & 97% conforming loan options.Also, you need to know the REAL deal with this buyer's "Mortgage" report credit and ability to obtain a loan.  

Find out about any other assets and source of income. 

I was trying to avoid hard lending but not sure if I can get a commercial loan or an asset backed loan. 

The rent to purchase prices ratios weren't great, however I was able to preserve my cashflow and buy into a bigger better asset with more equity.  

Truly asset based lending.

Or diversify and invest outside real estate to increase returnes.I think it depends on where the asset is located IE here in Portland a red hot market and historically solid ( at least sinc e1992) or take the 50k and invest in the hood somewhere in the mid west.. me i would recast the mortgage.or take the 50k and invest in a reit or syndication deal etc.. and diversify or buy a performing NOTE that is solid and make 8 to 10% on that.then the thought is if you buy a rental do you want to do that for long term as this is work.

You can do more bedrooms as well as commercial gatherings with a "type B' permit, but type b permits are much more costly and difficult to obtain.