Neither property will be cash flow by the time we are moving out (unless rates drop dramatically and we can re-finance). 

There are several key differences and considerations to keep in mind when investing in a larger building.First and foremost, financing a larger apartment building will likely require a commercial loan, as opposed to a residential mortgage.

Hoping I could do a Subject 2 as the owner purchased in 11/2022 and regular finance to the deal price. 

How did you finance this deal?

When compared to bigger complexes in desirable neighborhoods, these properties could have a higher potential for cash flow.Examine Financing alternatives: Look into financing alternatives, such as FHA loans with low down payments, that are geared for first-time homebuyers or owner-occupants.

Please excuse my ignorance. 1) In an attempt to learn from folks who have done this, what is the best way to finance the gut rehab of the existing property and the new construction of a duplex?

selling said property, other than 1031 or doing a land contract AKA seller financing to avoid these gains. 

Such a move could affect your ability to secure future financing by impacting your debt-to-income ratio and overall credit utilization.

Rental property you financed through the heloc is technically cash flowing on its own.

Seller finance could help you with this however I'm not versed on the lose of benefits/Medicaid's role.