If I find the buyer I would charge and extra 1.5%. 

When we were first selling homes in 2021, Buyers were upgrading to larger homes since interest rates were 3ish% and they could afford the extra 300+ sqft.Today, we see smaller homes selling significantly faster than larger homes.

It brought in 120k last year, but I think we can bring in much more as we do upgrades including adding an extra story on top and as we run it as a bed and breakfast.  

You'll see a hike in rate going from FHA to conventional in general (especially if your plan is to pull some of that equity), but you're also going from owner occupied to investment (if you plan on moving) which is another layer of pricing adjustments.

And really, any ARV over $800k is extra "cash out" for you. 

I also think most markets won't see anywhere close 6% cap rates (for single family homes which is what I personally invest in).The questions you get to ask are then:Is the extra 4% worth the hassle of management and lack of liquidity.   

You are not going to qualify for active and will not get any extra depreciation.

CA doesn't have an extra $30b/$40b laying around to do that, not to mention the additional billion to actually do the project to be build ready. 

Home mortgage is $3700/month and $500/month extra payment towards the principal.

Is that available to scale up and if there are investors,  resources to manage that side if the business.I imagine a $60M/year Lending business will need systems in place and more than 1 extra person.