This is not a very common issue though.  

But I’d like to get a gain from this, specifically some monthly income for myself.

Hire land use attorney to confirm what home type I can build 4.

I've had many single family insurance claims and never had this issue.Was the agent you are using quoting the same insurance carrier? 

Get used to underwriting properties to build confidence.

This will help offset the townhomes new mortgage payment which will help me qualify for the loan.I'm not sure what this means and if this is common for a lender to do for an investment property.Has anyone experienced this?

This expands your possibilities.

I was previously increasing every 5 years , but think I may need to shorten this amount of time, as I near retirement and could use the income.  

Therefore the buyer could also use the property as a vacation rental?  

For sure, let's talk this weekend at your convenience.