Ready to jump in, but not sure how!

[Justin Edgerly]

Hi everyone! OK, I have two SFR homes free and clear. I live in one, my grandmother and her caretaker live in the other. We have our eyes on a new home for me that has a guest house that would suit my grandmother perfectly, and she likes the idea. The initial inclination is to keep the properties as rentals, but there are several approaches available to me.... Here are the details:

Both properties are in my grandmother's name, currently in a living trust with me as sole beneficiary. 

Both have a very low tax basis of 50k each. Being in California, they both also have Prop 13, so the property taxes are only $500 a year per house.

Market value of 500k each. 

Grandmother is eligible for a Principal Residence exemption of 250k from capital gains as she has lived in the home continuously for 30+ years. 

Being in California, they both also have Prop 13, so the property taxes are only $500 a year per house. 

Her income is only $1300/month of Social Security.  Mine is ~240k/year gross at a secure job.  I pay for all of her living expenses as well as for her full-time live-in nurse out of pocket ($4500/month)

The Dream: 

Add myself to the titles of both and cash-out refi one or both to purchase the new property (which is an REO, bank wants 50% down on 700k) and remainder of loan against new home. Want to put 100k into hew home, and it will appraise for 900k all day. 225k out of House # 1. 225k out of House # 2. 350k goes towards down on New House, plus 100k toward remodel. Remaining 350k against New House. After a year, refi New House to pull another 350k out and pay off House #1 and pay down #2. ~100k remaining on #2.

Reality:

Nothing ever goes as planned.  I find myself explaining away the negatives....  Can those of you better versed in this help me understand the greater consequences?  

Do I sell both properties and pay cash for the new home?   Sell only the property she is in to claim the Capital Gains exemption of 250k? Keep both as rentals since my property taxes are unnaturally low?  Do the cash out refi, but leverage the money as down payment on more properties?