Breaking it down by room can make the process a lot easier.There are also some great pre-made checklists in Airbnb host groups and forums if you need a starting point.

I was able to move out of my parents house in an expensive market by using the other unit rent to cover the majority of the expenses.

Think multi unit residential, commercial properties, or purchasing houses “subject to” existing mortgage.  

Why not tap into the network of one of the existing showing apps like Showami?

The money that you end up owing to repay the loan over the 5 year term is now post income tax money unlike how you traditionally are supplying your 401k with pre-tax money.  

Building on existing land helps eliminate the issue of land scarcity, which is a significant challenge due to California’s high real estate prices.

Sometimes, buying an existing property can be more cost-effective and less time-consuming and maybe require slightly less permits, etc. 

At that time we could renovate the ground floor apartment and potentially turn it into (2) apartments for a total of (5).My questions come down to how do we deal with the existing 40k mortgage, whether we can make it work so her parents aren't paying much in rent, if anything at all, and whether or not we set up any legal entity, like a trust to help the legal situation of paying off her sister down the road. 

You can’t change an existing lease.

Through the LLC structure it is possible to take advantage of the existing mortgages modified first at 4,125% 22yers and 1%, yes one percent, for 40 years.