My last HELOC (with PenFed) will adjust at the 10 year point, and become a regular amortizing second mortgage. 

During the initial walk-through, it was pretty obvious that it needed some work - our REA told us it was an investment property that just wasn't getting the regular maintenance that it needed. 

The reason is that encourages tenant to pay last month rent and leave you place clean to get their larger deposit back.

The house under contract now is technically move-in ready, so we could either use the regular FHA loan or add a little value to it by doing a few cosmetic updates with the streamline 203K, but I am worried about wasting the 203K option on that house instead of waiting to see if we can get the second one that we'd rather have.  

It is a regular Fannie/Freddie loan assuming your finances are good.  

I want to have clean documentation so the people renting know the rules and I have something to fall back on when I question is brought up. 

If this is something you regularly encounter with new tenants, I would recommend getting a checklist lined up for lease signing walkthrough so you can make sure all your points are covered before the keys are even handed over.   

I don’t qualify for an FHA or regular conventional loan due to the fact that I did a short sale in 2016 so I was asking him about doing a hard money loan.

My question really is would you let my current house look like **** being worth at least 350k and hopefully make the new house worth more because it looks so much better or just clean everything up and make both houses look great and raise property value that way?

A contractor that you know and trust with no history of such things is another story, where I would probably just let the contractor know I'd made a note of it and was giving them the benefit of the doubt based on their clean history - further explaining to them that I had to take that action/stance as a gesture to the tenant, and that I value their service.