@clarkfan1979 I think on paper, a construction loan would be probably the best path forward with competitive rates and if you don't want to refi/put a LOC on a rental property.
That said, you'll have to be aware of the terms of the bank - they may make you pick from a list of their qualified contractors, aka, sky high priced. But if you have a contractor you like, you may be able to get them on the approved list.
If it were me, I'd probably go with a line of credit on an existing property, even if I'm paying a couple % higher in APR, for the following reasons:
1) I would be essentially working with cash and could negotiate better cash rates with contractors and not have to deal with the bank for inspections, draws, their qualified contractors, etc.
2) I could do more work myself - an 800 sq/ft 2/1 could be finished out yourself easily in a couple weeks and even sooner with some unskilled labor help. Paint, flooring, vanity/toilet installs, kitchen cabinets/sinks if you're so inclined, basic lighting/fixture installation.
3) I would be encouraged to pay down a LOC faster.
4) LOC cost almost nothing to open up vs a refi/construction loan will have closing costs of approx. $3-6k+ based on a 200k loan (of course will vary based on your bank/relationship/market).
Hope this helps. This sounds like a great opportunity to build some equity and cashflow.