I fear that while Toluca Lake/NoHo are decent areas with studios nearby (for hedging of market correction risk), 2 br condos are already at $500K and therefore further upside might be limited.

Here are the rough numbers on one of the houses, both are similar:Total investment (acquisition, remodel, carrying costs) - $200,000Current value (after netting out selling costs) - $270,000Potential Rent - $1,500/monthI can do a refi and get my $200K back out of the project, that leaves me with a mortgage payment of $1,400 including taxes and insurance (assuming 30 yrs. at 5.5%). 

Be cognizant of the fact that the city is a crap hole though and while you may have ok tenants, you also run the risk of having bad tenants. 

I am doubtful that the seller has been approved for the variance for a 2-unit, and am wondering if I should move forward to submit an offer without it.The mortgage company should be able to finance the loan, but my question and where all the risk lies is on the exit. 

There is low-risk, moderate-risk, and high-risk deleading work. 

To me it depends how much debt you want to carry.

My question is how do I make sure I can refinance the property in the 2 year window that the seller is willing to carry.

However, it depends where you both are on your risk-tolerance for taking on additional debts while you have student loans that have to be paid no matter what.

Then again it might be worth it to you to build up a solid business relationship with this particular contractor but it seems to me he is already reducing his risks since you are paying for his labor.

Especially with the risk of breaking the plumbing.