@Nate Sanow  I feel your pain. 

Adding bathrooms and/or occupancy can mean your current septic system is not adequate and not to code.As other post have pointed out, it may not be possible to bring the code legal There are issues such as zoning, setbacks, HOA rules, Leach field size (there are some higher tech options for areas with inadequate leach fields but I suspect getting approval would be a pain), construction to code, etc.  

Sean, I am not fimilar with the area but you are already ahead of 80% of newbie investors as you have actually identified a pain point for a seller, know the area and understand the demand in a college town.

@Cayton Green - condos can be a major pain, especially with some recent tightening of requirements for conventional lending on them.

Is it a common thing to apply for change of use permits on older commercial buildings in residential neighborhoods, or does this sound like something that would be a huge pain and greatly deter renters and make it very hard to find a tenant?

Conventional and FHA rehab loans do exist, but they are the biggest pain to work with. 

I feel your pain & in 30 years I have never had a "high demand" HW tank last longer than 5-7 years.

Also, you may be in a Historic District overlay which makes everything (including STR and outside renovations) much more painful.

Great in a strong market, painful in a market that doesn't appreciate (think Midwest). 

Is that worth the downstream pain?