If there is a house with a detached ADU, if the main house was built prior to 1978, it is subject to rent control.A buyer can attempt the Ellis Act, which could take months (owner occupied loans generally require the borrower to move in within 60 days) and cost $20,000+.

I'm a little torn get a gutted house that makes no income or find another 50K house with an occupied tenant to get more income?

The seller may not be Interested in interest only loan (especially if owner occupied).

For financial, insurance and logistical reasons, I will need to occupy one of the two units that are currently occupied.  

The ground floor is occupied by a commercial restaurant, and the upper floor is designated as SRO (Single Room Occupancy) under a pre-existing non-conforming use.

I am getting mid 5s on a conventional primary owner occupied loan

I know a few that are in this situation.WNC may be different as you said that a lot of the properties work well as STR and owner occupied homes and as rates come down you will have a bigger pool of buyers being investors and owners.  

You are correct it’s a state by state thing but most states it is allowed - it also matters if it’s a primary or investmentFor example I believe Arizona you cannot get a deficiency after sale on Owner occupied but can on investment and in Texas I don’t believe you can attach to the home.Btw this is not something I typically do - but if the borrower is not going to play ball, then that’s different

Was conventional loan on a non owner occupied property at 60% ltv on a cash out refinance. 

You will get less than market because they are occupied.