Then they could standardize your rate saying you cant charge $125 per night in your area.

Usually there is title insurance in place to help with these matters.

and that is with outdated numbers for taxes and insurance.

Also generally less paperwork :) The only downside I have found to owner financing is that it can be a pain to get them to release the lien once you are done whereas its a standard process for banks.

With that kind of equity, the elimination of mortgage insurance will offset the increase in rate (or at least soften the blow). 

But we could get some insurance to cover it.

When property was purchases Insurance was not purchased.

Hold in our own name and purchase liability insurance (incl. umbrella insurance)2. 

Do you think it's better to do a FHA on a true duplex and take the increase with the mortgage insurance or to do a cheaper single family where I could create a basement apartment as a makeshift duplex paying the 20% to keep the mortgage low and easier to cover with the rent it would generate?

They ruin roofs left and right and your insurance is higher.You can use a turnkey provider or find a local agent/ pm and go that route if you go out of state.I have done both and think a combination is ideal.