We also utilize the detached garage as a wood working area for our business.

I’m going to refinance regardless to drop the PMI, but I was thinking I can also utilize the equity and keep around the same mortgage payment that I currently have after borrowing.

We do that as a "Utility Offset" in order to protect our owners from extremely high utility bills when there are more than the normal guest count.Hot tubs can be incredibly valuable!

Utility bills, rental lease agreements, paychecks with home address, address on IRS returns past 5, 1099 and w-2 mail to address, USPS mail records ... are what you need if you push the limit and get audited.

Everyone same loan product, all will utilize as a short term rental.  

Just send the break down of utilities.

Currently Rents out for 1200 per month, all utilities included, cutting my living expenses in half.

The strategy I plan on utilizing once I get through the Winter season is to send a rental increase package explaining why a rent increase is needed, showing comps of current market rents (for instance, using rentometer), and offering a few different options such as a year lease at a reasonable price, a 6 month lease at a higher price, and a month to month at a slightly higher cost.

That's great you were able to save up 35k, which is a fantastic place to start and you can utilize a low down payment mortgage.Denver metro has a lot of great pockets that work for your goals with price and proximity to the mountains and the city such as Lakewood, Wheat Ridge, Arvada, west Denver (west of I-25), Westminster, Thornton and Northglenn.

Sometimes including utilities.