Our primary residence is currently inhabitable due to hail damage.

Is what it is but if they are reported to the city, they will really understand what inhabitable means. 

I have been more successful with my property in a little bit of bigger town (more than a few thousand inhabitants) and being closer to town.

If for some reason, you're inhabitant wants to sell or rent it out for market value at anytime, you all still win!

If the tenant is living in inhabitable conditions, do you believe this will stop them from withholding rent? 

In larger scope rehab loans, the properties are usually not inhabitable, so there is less risk of occupancy fraud. 

Can I keep his deposit if he wants to break the lease early as it is by my definition inhabitable?

You may have to raise the price point a little to get a 4 family on a conventional loan, because it will have to be inhabitable, but its also possible to fine operational but 'ugly duckling' 4 families in St.

The city must UPDATE it's zoning, so Phoenix (along with all other cities with 75k+ inhabitants) can set some limits.

Try submitting a right to know request (RTK) with local municipalities for properties deemed inhabitable or placard.