The health dept will declare you unit uninhabitable and they will be forced to move. 

Be careful in the City of San Diego, as they have effectively lowered the threshold for declaring paint to be lead-based pain to 0.5 mg per square centimeter, when it is 1.0 in almost all of the USA. 

(Fast forward, an expert witness has declared your unit substandard and you have to return 100% of the rent, because there actually was a problem with the heater and it wasn't for whatever reason providing sufficient heat.)The gap under an EXTERIOR door would be a problem in CA, especially if there was water intrusion (probably not on it's own, but combined w/ other problems, it would be a point against you). 

I've been told if i declare it as an investment, particularly with multi-unit, i will be forced to put 20% down.1. are ANY conventional lenders going lower than 20% for said deal?

I wasn't aware of any "DECLARATION OF EASEMENT"protocol and discovered that there were no CC&R's nor is there an HOA.

Income is declared on your tax return.The rate you pay on your rental income will be the same as the rest of your income.

They had to declare bankruptcy.

Length of stay may vary from city to city and some are declaring anything less than a full month as STR.So if today there is no such restriction(s) and it is a viable business model for you now, how long can you assume that will continue and if it changes, can you survive the change.CAVEAT EMPTOR.

So if one defaults with a mortgage because they cannot make the payments, they take a huge hit with their credit score and finances and may even declare bankruptcy.  

On the latter, you can consult with your tax accountant and they can advise you how best to structure and declare the loan.