The loan we were applying for is an FHA, which stipulates we must provide a signed lease for our half of the duplex (to be newly rented out) but for the other half which the parents "own" (in reality all three are equally owners of the entire property.) we would need to provide proof of rental income on our tax return, however her parents claimed that so we seem to be SOL.The mortgage is covered, we can rent it out no problem, but the underwriter is saying on paper it looks like she is responsible for the whole duplex and the rent for half of it is unreportable.

One last challenge is their estimate of property taxes - they are all VERY low:(Michigan has some interesting property taxes because there's a Taxable Value and a State Equalized Value, as well as Homestead and nonHomestead millage rates. 

She had a choice of putting down a deposit equal to two month's rent or paying monthly "deposit insurance." 

So to answer your other question,  the estimated cost for this build 3 times the cost of that duplex build for roughly equal square footage and including the lots and utilities and everything for both. 

Point being - if appreciation is close to equal to the interest paid on savings (5% currently) - wouldn't it be much easier to take the 5% from the bank with no headaches associated with owning the property?  

@Peston Parsard not sure if enough viewers will note & care about free internet and pay more in rent.Regarding the MLS listing, going to guess your PMC isn't charging you a Placement Fee equal to one month of rent?

Do we just lower the sale price by equal amount and the contractor will need to take payment from the new owner? 

What I've learned in the end is that these home inspectors are not skilled in communication and they treat a small issue equally with a crack in the foundation or faulty electric panel. 

@Daniel Stoychev both location and numbers are vital to consider when evaluating a RE investment.

That's $9,200 lost, which equals over two years of profit lost!