Also, after a year, the mortgage hasn't been paid down by much, especially if it's a 30 year mortgage.The only challenge you may run into is if you purchased it using a low or no money down mortgage option like FHA or VA lending.

You are referring to "no money down" real estate.

and if you don't have enough money to house hack in San Diego... save up until you do.and if you want to move somewhere else, house hack there. 

So if they can get guaranteed 5% interest in an account they can get their money out of at any time they’ll want 8-10-12%. 

During this time you are not generating any return from the money invested in the ADU.

In this case, would he actually need to pay any money for the down payment, or does it basically cancel out in the debit/credit line items?

I do pretty decent for my age, and I live at home still, so I've been saving up a lot of money.

Keep in mind, you should have already had a conversation with the hard money Lender to know their terms and process, and be ready to perform. 

My remodel strategy is to use some of my own sweat equity and running subs to save enough money to upgrade the flooring, kitchen and baths slightly beyond the peers. 

Private (hard) money might help with renovation but will be pricey.