These factors ultimately increased my mortgage payment thus reducing my cashflow to about $0/ month after accounting for vacancy, capex, PM fee, etc.

RE investing has been real good to us.So the AHA moment really needs to be for all parties of the decision making and for us that happened in ~2005 (about the time we refinanced both properties) but we did not have the resources to purchase until after the RE had depreciated due to the GR.To the title of the post: We basically have used refinamces to leverage both market and sweat appreciation to have increased both our RE holdings and the value of our other investments. 

I dont have problems with drafts in the house or have any inefficient heating or cooling bills.I got a quote to repair all the siding and repaint everything for $7500.Does this increase the value of my house when I go to sell it?

I'm wondering if I should let him live without the lease as he's increasing the value of the property while still paying rent.

In response to your question about a purchase with an initial cap of ~5% equating to a great long term investment - equity growth potential is certainly part of it, but I’d argue that the propensity for consistently increasing rental rates and the stability of the overall rental market are an even bigger piece of that puzzle.I can’t really give you a definitive opinion on your specific situation without knowing more about the current make-up of your portfolio or your goals for passive income.With that said,  there are absolutely  methods to reposition equity in high growth potential properties to more income-centric opportunities within our market. 

Obviously, the home could be sold as the old sq ft and the investor/buyer can just go and permit it for the increased sq ft,  but I would think that the county automatically will go and assess the home as soon as it changes hands since this the county has probably seen this before. 

That way your monthly mortgage (and the interest you are paying) doesn't increase but you access to the equity in your home (some banks are giving up to 95% LTV).

If you want to increase cash flow then we can talk about reducing debt.

The properties were bought with 100% leverage, so once the loan for the down payments are paid off in a few years, the cash flow will increase pretty dramatically. 

(There is uncertainty though how much Feds will increase interest rates next 6 months.)