I am not sure sellers will be forced to meet demand, they could just pull off the home and sit tight until the market equilibrates.

Although this is a single family home, I rent it by the room to college students at the local university who want a communal living space, functioning similarly to a frat house.

All the common areas are communal use and basically you are hoping everyone gets along.

The security deposit "he did it, no she did it" to the communal area can be a nightmare, and most tenants (who did not collectively apply together) refuse to be on a lease together (joint responsibility).

Does her insurance company know she's turned it into a communal living arrangement?

Here to learn more about the following topics:Rental Contract LawRecourse for different levels issues that arise;Benefits of setting up an LLC (I have not done this and wonder if I should);Purchasing additional investment properties and best way to finance these;Looking forward to participating in the communal discussions.  

A camp next door to ours is now for sale, and we are considering buying it together as a part communal vacation site and part wedding/vacation rental.

A camp next door to ours is now for sale, and we are considering buying it together as a part communal vacation site and part wedding/vacation rental.

Lots of those out there.Yes, a 5 unit property would need to be financed commercially.A 4 unit property with a detached communal rec room could be financed as residential. 

When you rental is put in service (first available for rent) you'll need to depreciate the building only portion (Excluding land) AND you'll need to back out your personal use space sq feet, AND then find a reasonable allocation for all of the shared communal space.