Even after remodeling, the home will not be as nice as a new one, and may have undiscovered defects. Also, depending on location and how cold it gets, your heating costs will be much more in a 1974 than a modern well-insulated home. The overall cost to remodel may be less, but the monthly cost to the tenant of the older home (with heating expense) may be more. I would try to replace the home with a single.
I am not knowledgeable about your city situation, but I would definitely do as much research on that as possible and determine what grounds the city has to prevent you from replacing homes. It sounds like you are currently in a position where you need a lawyer.