If your able to manage the property at all cost, meaning if a tenant damages the home and you can handle fixing and processing the billing yourself, you are ready to put a fractional deal together. 

Option 2 was an option but I don't think I can accomplish it without damaging my relationships in the area.

That way if they damaged the property between when they moved in and when you purchased the property, you will have documentation to make the proper deduction from their security deposit. 

The damage is visible on the outside already.

The final straw was going underneath the house: a water damaged subfloor which was there since the house was purchased was to replaced (reminded of it multiple times), it has not and tiling and flooring is down in the area the subfloor covers.

I made sure to buy extra and store it (typically in the rental attic) should a tile get damaged to the point where it needed to be replaced.  

An alternate for this is liquidated damages clause, this will be easier and legal to enforce, any reputable contractor will sign this.

The occupants of my house were locked out Feb 5th, 2019 and I am still trying to fix all the damage, mold remediation, etc.

Does the damage go through the next door neighbors insurance?

Check for water damage or leaks3.