Our knowledge of the zoning, water rights, easements, etc of land in the area was invaluable.

IMO you will further restrict your renter pool. 

:Class A Properties:Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.Vacancy Est: Historically 10%, 5% the more recent norm.Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.Class B Properties:Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 yearsClass C Properties:Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation.

It also had water drainage issues and no landscaping.

However, the estimated value of my new construction, complete with a pool and ADU, is at least $1.35 million.Capitalizing on this increased property value, I approach the bank for a cash-out refinance.

So there is a limited buyer pool and an even smaller pool of lenders for the buyers.  

Renting out by the room can be tricky, but remember that your utilities will be used up a lot more the more people you have in the place -especially your water bill.I would have it in place that utilities are split equally between all tenants.

You noted your water retention is off site, so that gives you more buildable space. 

even back in 2002 when i started funding out of state buy and hold folks.. not exactly sure on eviction but I know for sure you could not turn off the utls and they run with the land  so many tenants simply do not pay their water bill and such in that city as they know it can be turned off. 

Rehabbed both apartments, new roof, siding, windows, furnaces, AC, and water heaters What was the outcome?