The ability to sell is what saved me. when I bought deals that were marginal. 

Although my margin are slender my expenses are almost nothing.

I would focus on making great deals - rather than trying to acquire an arbitrary number of properties.For an option to buy to be profitable, it has to be significantly below the purchase price and you have to have the down payment to exercise the option - which would be 25% of the option price on most loans.The margin is needed because you have realtor/marketing/carrying costs if you buy and flip. 

Another problem was that I was new, largely self-taught and had very few tools from which to rely on or skills of exoerience, to be candid.One of the best skills I gained was the confidence to walk away from marginal deals and not waste time on unmotivated principals. 

On the other hand I have higher level house with small margins.

.-  On a $40K purchase, that's a 33% cap rate.Looks like you have a lot of margin for error in those numbers and it's likely still a great deal.As for highest-and-best use, you'd have to run the specific numbers for the various scenarios (divide and rent vs. single tenant) and see what the numbers say...

I had been planning for a typical rent increase at some point to cover what was a narrow margin on a new duplex.

It's in a great location, but my biggest problem is that the margins are so tight that it doesn't make me very much of a profit ( maybe $250/mo when occupied) I feel like of I could break even from a sale then I wouldn't be in a bad situation and it would clear up some financing abilities to but another property with better numbers since I've learned a lot more than I knew when I first bought.So my question is, am I crazy for considering a lease option to get out from under a low performing property?

The first 4 years are about breakeven, but the profit margin really opens up after that.

We'll pursue purchasing a SFR for a flip if we can find enough sold comparables to support our target $ margin.