The home had previously had a garage converted to living area.

I have a property in central Dallas that is identical in size and zoning to other properties in the area that are being converted to muitifamily 5-plexes.  

You can always convert equity to cash flow.

The lender is acting like owning a second house in any form would trigger converting the first to an investment property (with a worse rate).

You could purchase a property to live in and then convert it to a rental after the mandatory occupancy period.

Sometimes they convert common rooms like family room or formal dining room to additional bedroom or Add adu in backyard Or convert garage.

That way you will know whether you can convert the unit to a higher and best use in the event circumstances change.You will also want to contact a commercial agent in your area to perform a financial analysis on this.

They offered a purchase + rehab financing loan that converted to a normal mortgage once the rehab was done. 

There are old houses converted into multiple unit apartments sitting on three of the lots and if this one is not included that obviously negates the assemblage.

There was a huge hiccup with the combination for foreign 15% tax and mortgage stress test in 2017 that drop prices and took just over a year to recover and bounce back..Don't look at appreciation  look at ratios, areas close to transit, if condos buildings not too older and higher than average maintenance fees..Converted duplexes are usually investors delight in Ontario and has been for years..