It's a former adult care home, so the layout is shared bathrooms, and this would allow me to not have to change the plumbing layout while offering a competitive price-point and unique experience to travelers.

I think you are best served to get the best advice and that is what will make your business work much better than the ones who don't care about the regulations.

Just keep your eye on the numbers, be patient, and, if the path feels a bit winding at times, remember that most of us have been right there the ones who kept at it ended up with the sweetest returns.Take care, Pat & JasperTurning investment visions into REALITY in Phoenix, AZ - Ranked #1 for residential real estate growth and opportunity by PwC

When tenants and owners feel cared for, word spreads.

.- Most cities do NOT care if an owner lives in basement, but will not allow a tenant to unless baement has legal egress window.3) Check local statutes if any limitations on how many unrelated roommates are allowed.4) Check with local building dept to see if rental inspections and corresponding requirements.5) Local statutes allow locks on bedroom doors?

If you decide to build new construction, be very careful with builder contracts out there. 

What I am trying to say is be very very careful in the city and speak to attorneys ahead of time in regards to the process, cost and how long it will take. 

Sometimes you have to drop everything to take care of your guest.

If there is a minor stain in need of cleaning that gets missed they can take care of that.

Since they notified you of this, you should get it taken care of as your insurance may not cover a claim if there is an accident because it was a known defect.