If she lives rent-free, you retain control of the property but lose the ability to claim rental-related deductions.For long-term planning, consult a CPA and attorney to ensure compliance with tax rules and align ownership structure with your goals, including potential conversion to a rental or estate planning considerations.

Are there any rules, laws, or regulations regarding this?

Asking in the correct forum will get a better response.Read the RULES!

Things like the 1% rule right off the bat, especially with properties that I know are undervalued, are good indicators of a "good deal."  

You’ll want to get really familiar with local zoning laws, short-term rental rules, and landlord-tenant laws as they vary by town if you plan on going the STR route.Focus on Cash Flow Early On: You might be tempted to go for something that appreciates quickly, but in the early stages, it’s important to find properties that bring in cash flow.

For me once I've identified the target market/ideal guest, my rule of thumb is if enhances their stay/they'd pay extra for it splurge.

I'm looking for something that meets the 1% rule in a B or A class neighborhood."

Seems like you should not have to but showing they broke house rules leading to damage may help. 

They are using rules to add multiple ADUs.Here is a list of why adding a single ADU in dingle family  zoned areas in my CA market is typically a poor RE investment:1) The value added by the ADU addition is often significantly less than the cost of adding the ADU.

Just do your homework (I need to do this way better) and remember most successful investors aim for the 1% and at least 80% rule ARV... if you don't see this in the deal, they agreed to buy it too high or they are making too much profit.