I just started my due diligence phase, but the first thing I need to do is better understand the financial feasibility for the project, and how the return might compare to other investments we have undertaken in the past, which have been mostly acquiring existing buildings and renovating, not new construction.

I’m not super keen on having long-term tenants in a single-family home in California, but I’m open to advice on that.The house is in decent shape but could use new flooring, a paint job, and potentially heating and/or central AC, as well as blocking/taking out the existing fireplaces (don't love the idea of fireplaces in a rental). 

Seems a lot can go wrong with this and I wanted to speak with existing investors and see what has gone wrong with this in the past and how have then fixed it.

Long-term rentals have existed forever and are a proven investment vehicle.

To answer your question about the downside or risks - there might be an existing or a possible lawsuit and you would need to be held liable for 50% of it.

Including taxed money seems weird since it's not part of our budget, we never see it, and it might as well not exist as far as our daily lives are concerned.

I took a 2 bed 1 bath house and converted it into a 4 bed 2 bath within the existing floor plan (2200).

This type of transaction will take years to go through the legal system most likely and if the sponsor is put out of business recovery will be non existent.

The sub 70% projects are very sought after and usually do not exist on the MLS. 

Subject-to Financing: Take over the seller’s existing mortgage payments while keeping the mortgage in the seller’s name.