@Anthony Angotti, The portion you hold for investment would qualify for 1031 treatment.

I could also use a portion of this income stream to continue to invest in more properties that will eventually be left to my daughters.  

Now we live in the property with a tenant in a back portion of the house with a private entrance.

While it is true and accurate that a "deposit" is by nature generally intended to be refundable, in the case where an agreement specifically indicates that a deposit in its entirety or a portion of a deposit is not refundable and it is agreed to by the parties as indicated by signature of the parties, then  as it relates to that portion so specified, or, the entirety of the deposit so indicated as non-refundable, it is not a refundable deposit.  

If the tenant is late on their portion of the rent, Section 8 allows you to charge a late fee only on the tenant portion...not the entire rent amount.So the late fee is often only $5-$10...not a big penalty, so Section 8 tenants are regularly late on their portion.

The problem: If I refinance the other property that I have and add in the other portion needed to meet the 20% downpayment, I wouldn't be able to purchase a smaller / cheaper investment property for about a year or so, when the SF placed is seasoned and I can refinanced again or wait until we have enough savings. 2.  

I've never had a problem with having a section 8 tenant pay their portion (as you may know if they do not pay they lose their voucher).

The fact that you will choose to forgo the market rent and live in the bottom portion is your choice.  

@Jeremy Paschedag I have heard of exceptions granted by the IRS for an IRA owner to purchase a property from their IRA.You may also take portions of the property each year.

Many crowdfunding portals already perform a portion of this due diligence when they list an offering.