However, small multis--2 to 5 units--often have low cash-on-cash returns and it's thus all about capital preservation and paying down your debt over time.

Preserving a personal relationship with neighbors is important. 

Capital preservation is critical at this time in the market cycle.

There is a lot more to the LLC question - when to do it, how to do it, current mortgage, proper transfer to preserve title insurance chain, DOS, future financing, management, distribution of properties per entity, insurance, partners, etc. - stuff barely touched in current thread.Here is a diagram to help you on your quest: asspro-cya-diagram

In general, lower  cap rates are about value preservation, higher rates are about wealth creation.Take a look at this tool I found: https://mapping.cbre.com/maps/caprate/app/ Click around and select Multifamily and type.

If that is the case, then prepare a simple, short agreement between you and the mortgage holder that you are to inspect the vacant property, as their agent, and estimate the cost to preserve it.

Not sure if I should gut it all and redo every single aspect or try to preserve some.

At least then hopefully with flat rents if they decide to not renew the option period with rental increases then the area likely will have higher rents per ft by then to release to the second generational tenant thus preserving the investors initial investment and then some.      

Well, neither does making a tenant responsible for property preservation of your asset.

Or Preserve the eventual financing opportunity?