While some of us want to preserve it within the family, others, including my late grandfather's wishes expressed through my grandmother, are inclined to sell if we can't make it financially viable.The house itself is a 1 bedroom, 1 bathroom dwelling.

Currently, you can add two units to any multifamily property through the state's ADU laws (ADU = Accessory Dwelling Unit).

When you say "According to county records, our home is permitted as a five-bedroom dwelling", that sounds strange. 

This niche area does not have alot of recently sold properties and the ones that have sold are condos in high rises not single family dwellings. 

As I need to register this business with the state and county, should I need to register LLC as "531110 - Lessors of residential buildings and dwellings" (NIACS code) or something else?

They add:  Creates many definitions including classes of dwellings, but specifically excludes all hotels, lodging houses, rooming houses, boarding houses, boarding schools, furnished room houses, lodgings, club houses and university and school dormitories.

Maybe see if you have a dwell in your local market?

Your strategy of converting the garage into an additional dwelling unit (ADU) and using the property for short-term rentals (STRs) sounds like it has paid off well, especially given the unique aspects of the property and its location.Your approach to identifying a unique investment opportunity that was overlooked by others, and your patience in securing the right deal, are key takeaways for anyone looking to invest in real estate.

We will not build out the current housing shortage in America with the conventional thinking of the last few decades, it will take a variety of solutions working together.Build apartments, build new manufactured home communities, fill vacant spaces in communities, create more accessory dwelling units, allow for density where it makes sense, and pull out all the stops to fix this crisis.

If you do not live there:  Dwelling Fire Policy (aka Landlord policy)  You could also insure it with a Business Owners or Package policy (Commercial policies) but they are normally higher.