Option 2: get a house with an in-law suite. 5 Bedroom 3 bath. 20k down, PITI would be $1200 get roommates for the upper level to live with me $350-400/month (goal would be 3-4 roommates).

Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced).

The thought of one property cash flowing over $1,165 is appealing, but the risk of lawsuit on a paid property makes me want to get a HELOC or refi and cash out.

A one page management agreement is asking for a lawsuit and trouble the same as a one page lease would.

My main concern is lawsuits due to accidents because of this associated water source.

(potential lawsuit?)

@Ashish Acharya I didnt know any better and always created a new llc for new purchases; I assumed these 3 family homes would have more individual protection in th event of any lawsuits.

You're a lawsuit waiting to happen and you're in no position to serve your clients properly.If your broker refuses to offer comprehensive training and/or a mentor, find a new brokerage. 

You will need to file a lawsuit.

The strategies discussed in these posts stop lawsuits before they even start, so you can focus on running your business.