If the permanent financing will allow you to recover most of your initial investment and the fair market rent covers the principal, interest taxes, and insurance with cash left over, you have a BRRRR.

There is a legit chance of a loss of initial investment.  

Because after purchasing the new rental for $700K that leaves them $300K initially, so take $260K to pay off their mortgage, and still enough left to cover a good chunk of the taxes owed. 

I am offering 15% interest on the initial investment plus 40% ROI after a six-month grace period.

When they sign the lease, it is one of the five key points highlighted on the first page that they have to initial.

Initially, our plan was to fix the drywall leaks, clean out the property, and relist it for a small profit.

As a result, we have significant water damage to the floor and rugs in that 2nd floor bathroom and a bedroom, plus there is even more significant damage to ceilings, walls, furniture, and rugs to 2 bedrooms on the first floor.Our initial goal is to dry as much water as possible with wet-vacs and dehumidifiers.

One thing that did provide some reassurance is that we took the initiative to verify they own the property through a county property search.

Initially, our plan was to fix the drywall leaks, clean out the property, and relist it for a small profit.

This initial negative equity position consumes the initial cash flow.  2) the addition of the adu makes the property multi family and likely makes rent control apply.