Based on what you've described, this sounds like moisture on the surface of the wall, which would be caused by excess moisture in those areas from the Tenant not ventilating the bathroom while showering or cooking with a lot of steam in the kitchen area.A contractor can put a moisture meter in the sheet rock and quickly tell if there is any moisture inside.

As a last bit of REI knowledge, if you think this situation is so bad, holly cow don't ever get into sec8 or affordable housing because you'll absolutely loose it, this is about as nice and simple of a situation as they come for Landlording, heck in a lot of ways it's actually a positive as now it can be market priced probably getting more $ and increasing that net cashflow. 

You can keep the excess and apply it towards next month's rent, but you should not keep it as if it applies toward this month's rent.$1,000 below market?

-All decisions on the property (renovations, sales, tenets, etc.) would be made together-Their rent would increase a bit, with the excess going towards paying me back for their half the down payment.

Plenty of good people loose plenty of money doing this.   

Who is entitled to the excess $19,000? 

What was once excess each month a year ago is now near paycheck to paycheck living, and I'll be damned to borrow money to finish the flip with the uncertainties that linger. 

Still 6 months seems excessive. 

At the same time, I would hate to loose on all the equity on the investment property if price goes down. 

Prove how this 1 simple fact listed below is wrong, that by following the basic standard investment real estate practices as defined ins standardized investment property finance for leverage and standard practices of operations etc. that all one has to do is WAIT and not only not loose $ but will profit, is incorrect.