The second floor was legal and they were forced to give my client a CO for the bathroom, allowing the sale to proceed.

I have considered carpet but that won’t help with the heating issues.

You will pay a higher interest rate and need a bigger downpayment.What you need is good STR insurance with plenty of coverage to protect you.An LLC offers some protection with contract issues (like kicking someone out during their stay) vs negligence, which is what you need to watch for.

Could you share with me what bank you found that issues HELOCs on Rental Properties?

The issue was eventually fixed but many landlords lost thousands of dollars.

In my market, this can easily lead to increased home prices, closed transactions that had no inspection where there are a lot of issues that could have been identified by an experienced agent, and a bad taste in the consumer's mouth.  

I have 8 rental properties financed through conventional loans and I’m having issues getting more. 

These tend to be mostly cosmetic interior rehabs (not always but usually) and you can usually avoid the big hidden issues that single family homes can have (structural, environmental, plumbing etc).

I am wondering if anyone has dealt with similar issue before?

I told them that I wanted to see repair bills etc. and proof that the issue is actually solved.