You should continue inspecting regularly (3-6 months depending on quality of units and tenants).

I have heard very bad feedback from my property management companies.

Now 1031 exchanges may only be done on investment real estate.What still has to shake out is guidance on what the difference is between equipment and fixtures that remain personal property and so are excluded from the 1031 exchange, and equipment and fixtures that become part of the real estate itself and so eligible for 1031 treatment.

@Ryan Johnston  at this point it's probably not a bad idea to call your agent and go walk through the active comps looking at fit, finish, styles, etc of the rehab. 

Too many loans go bad the VP's at the bank said multiple people can get fired at the banks.

Honestly, it's too bad that the operating part of your dad's business does not carry with it some residual value of some sort with regards to that commanding a sale price.My hunch would be that this would be far too risky to embark on as a first go of things.Especially, from what you're mentioning this may have a large impact on the quality of your dad's retirement.If you have the funds and can structure something, the place to start would be to engage with an A/E firm to get a cost estimate generated for a concept building like you're mentioning. 

Whether good or bad.

I've had a very interesting proposition for a new on the market, higher end, flip property.....A buyer, due to personal issues, has bad credit - but cash in hand.

Personally I'm not sure that I would ever do it on my own residence, but it doesn't seem like a bad solution for rental properties where every penny is being pinched as @Mark Fries suggested. 

Serve them notice, evict them and move on.Your life will get really easy when you have quality tenants that pay on time.