I am sure you know, but Freddie 5% down is also a very viable option for a 1-4 unit purchase and it doesn't have any self-sufficiency requirement.

It sounds like the prospective Tenant Buyer lacks credit and sufficient income, Not a good combination.The way to put together a successful Lease Option (rent to own) with Tenant Buyers is outlined here:https://www.biggerpockets.com/forums/600/topics/58...

If your water heater is a sufficient size, likely one of the two elements is burned out.

I've searched up and down BP and the worldwide web; I am trying to determine if serving my month to month section 8 tenant with a notice to quit sufficient.

Are you implying that a "RELEASE OF RIGHTS TO POSSESSION" form would be sufficient, rather than terminating the lease and creating a new one?

4) Should I involve a RE attorney or are the CA Realtor Assoc Board forms sufficient?

Personally, I focus on having sufficient reserves available to get me thru a soft patch. 

4) Should I involve a RE attorney or are the CA Realtor Assoc Board forms sufficient?

We also expect all tenants to prove sufficient income.

The properties and the loans will most likely need to be in your personal name (no LLCs), and you'd need sufficient credit, income, and DTI to qualifiy for both loans simultaneously.