I'm looking to finance the project long term in a way that is helps me create positive cashflow.

If it's worth that much, taking a HELOC on it should not be an issue at all long-term or short-term as long as the bank will do it.

It depends how long you plan on living.

I would also weigh if you plan on staying in the home you are in now for a long time or move in the next 5 years.

What’s not working right now is traditional long-term rentals—high interest rates have crushed a lot of those deals.

This is perfectly fine if you are going to be living there a long time, but I see people who use a home as a stepping stool home to a larger home in future and make it very customized to their liking but then when try and sell it, it does not appeal to the masses.

How feasible would it be to transition her to Section 8, and how long could this process take in Brooklyn, NY? 

Find out what financial problem you are trying to solve in the short term until your able to get to more "long term" problems that real estate helps with 

What’s the current loan balance and terms with the hard money lender?

While the prices are attractive, I'm concerned with its long term viability.