If you do want to go this route, make sure that the underwriting of the investment property pays back both its mortgage and the monthly HELOC.

Opportunities still exist here.

The mortgage guy told me the other house would be treated as an ADU and give me no real value towards the value of my future mortgage.Not sure if that helps much?

Another draw back is short term your expenses will be higher because you are paying the mortgage plus paying back the loan but that is a short term draw back until the loan is paid back.How it works: I have experience with my wife's company and mine, each is a little different. 

The home was a bank foreclosure from a reverse mortgage.

No mortgage on it.

I'm not talking about cosmetic fixes, I'm talking adding bedrooms within an existing floor plan, creating a second unit (like an ADU), etc.

In addition our healthy balance sheet allows us to pre buy mortgages down to as low 3.75% for our buyers, most builders can not qualify to do this.

Unit 2 - long-term rental (this will usually be with an existing tenant since you already have that running well or in a larger unit that might net the highest rent as a long-term)3.

They could offer different products for single family vs multifamily so it's a good idea to get with a lender to see what they can do that may not be your typical mortgage type.