This initial negative equity position consumes the initial cash flow.  2) the addition of the adu makes the property multi family and likely makes rent control apply.  

I would want to know how you handle all of the negatives and bad outcomes long before you told me how great the investment was going to be.  

The cost to build will be significantly more than the amount of “value add” of an ADU putting you in a negative equity position.

Started looking into tax implications and yeah 6% kills all cash flow we were hoping to get and would have us in negative cash flow (-$221/m to be exact).

Although whichever option you go with make sure you're also thinking about the long-term property value and what makes the most sense vs trying different angles now that negatively impact future resale/property values down the line. 

Throwing good money after bad to delay a negative report.  

As a couple others said emergency would negate the $500 threshold but they should contact you to notify when it happens.

Also, focus on 2 years of job/income stability.Class D Properties:Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciationVacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Also, focus on 2 years of job/income stability.Class D Properties:Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciationVacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Quote from @Emily Gowen: I only recommend investors sell when they can move the money to a better-performing investment or when the sale moves them closer to a specific goal.