With some exceptions, coach houses tend to be less visually appealing than all the other buildings on the block.

I am struggling to decide wether I should try and save enough money to barely have enough to go with the conventional loan or just get an FHA loan for 3.5% and have some extra cash reserves (the one reasons FHA doesn’t seem appealing to me is because of the mortgage insurance fee for the life of the mortgage).

I'd consider Cottonwood but their rather draconian rules on ADUs, short term rentals and non-related housemates make it less appealing. 

We have another rental a block away and did great getting a good tenant, so that's why this house was appealing.

If the project works without  the variance then buy the property and the variance would be the bonus.I have years of experience with both building appeals and zoning variations.  

What should/ can I do to make this deal appealing for both parties.

The clean, well kept, great curb appeal neighborhoods often fall below the 1% rule (a $220k house that’s 10 years old might only rent for $1700-1800 MAX).

I fall in the same camp as @Dennis M. in that something about it just doesn’t appeal to me.

I have increased the curb appeal of the fourplex.

If spending 3-5 hrs minimum a week on your property doesn't sound appealing, a quality PM is worth 8-12 percent.