Pets (or humans) can always do more damage than that but the market in your area may not bear much more.

Also, another thing to consider is an appraiser is human, sometimes they can't really justify a big jump in value in a short amount of time, regardless what the house is, in their mind, they might subliminally ding you a bit, because it just appraised much lower, and especially after 2007-09, appraisers have their back to watch, appraisers were going crazy at that time doing exactly this, so sometimes it pays to wait a little while just for that reason as well.

I am looking into adding a secondary dwelling to my lot.

You are right, I must never loose sight of the humanism that goes into our relationships.

Collectively we net $4,000.00 a month in wages.The lot is zoned SH which allows a 2nd dwelling on the property.

I humanize the applications with pictures of the Tenant Buyers stapled to the applications. 

I'm interested in investing in perhaps a multi-family dwelling in an effort to leave the renters world and also generate some income. 

You will want to require your tenants to get a renter's policy, which covers their stuff, but not the dwelling.

The back home is one big open room, no HVAC, but is has a kitchen and bathroom (so the lenders see it as a dwelling unit).  

IE homes went from 500k on average to 1 mil. ( talking SF peninsula and prime LA) there were many human interest pieces in the sunday papers ( remember those you used to have them delivered to your door and then read them )... about people doing just that cashing in and moving to some little town In Iowa or Ohio or some other very inexpensive place to live and raising their kiddo's etc etc.I would think our average dual income family ( that's average earners) probably make 100 to 120k a hear combined... my 36 YO has a salary over 200k at intel plus her hubby... and they live nice but not over the top.. if she could telecommute to some other mid west area that would probably be a nice living and lifestyle.. but its still work .. but their is work in all we do whether its rentals or going to work.