Ok after much mucking around and playing around it was the file request which wasnt including the subdomain folder, which was causing it to not find the file location. So I managed to do a manual check for the file, and this is what i got. This seems to do exactly what i want. Im not sure if there is a more efficient way, but this is what it got.
#-------------------SUB.DOMAIN.COM---------------------
RewriteCond %{HTTP_HOST} ^sub.domain.com
RewriteCond %{DOCUMENT_ROOT}/sub_folder%{REQUEST_URI} -f
RewriteRule . %{DOCUMENT_ROOT}/sub_folder%{REQUEST_URI} [L]
RewriteCond %{HTTP_HOST} ^sub.domain.com
RewriteCond %{REQUEST_FILENAME} !-f
RewriteRule . sub_folder/index.php [L]
#--------------------------------------------------------------
instead of
RewriteCond %{HTTP_HOST} ^sub.domain.com
RewriteCond %{REQUEST_FILENAME} !-f
RewriteRule . sub_folder/index.php [L]