In your scenario you'd have a potential tax event on that $200K difference.Here's a creative way to access most of that money tax free however. 

You don't change your business because of one potential threat.

It isn't one of the cheapest in all of Central America; however, it has so much untapped potential that is hard not to look the other way.

Are there any potential risks or downsides I should keep in mind before proceeding?

It’s clear you had a sharp eye for opportunity with this duplex, especially given the prime location and potential for adding value through additional bedrooms.

It has so much potential.

@Kash Tacke I'm a big fan of ADU's in general especially here in the mid west, yes you could potentially be on the front of the wave, but housing density is the solution to the affordability issue, anytime you are investing with affordability in mind is a great strategy to me, and sound like there are some incentives or at least supporting winds form the local city, that in itself seems like it would be worth at least approaching an architect or contractor to bid up some plans or concepts to take tot he city.  

It's easier to scale with multifamily properties due to income potential and operations.

City has so much potential.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!