You did not state the city in OC, but if it is in Santa Ana, they have a fairly extreme rent control that passed this year so i would not buy multi-family there unless your are happy with the return without any meaningful rent increases.

Even if you plan to live in it as a primary for only 5 years or even keep it as a rental, you'll likely have several opportunities to sell it off at a meaningful gain before then, too. 

Cash flow is a holder why your asset appreciates.then you 1031 into a bigger property and keep rolling up that way.. without any or meaningful appreciation and capturing that appreciation to move to bigger and better .. your numbers are correct. 

If the ADU adds a value less than the hands off ADU addition costs, this impacts the investment in that it can make it difficult to extract the ADU investment via a refinance.  

This will consume multiple years of cash flow to recover the initial negative position.As you indicated, the issue is not only that the initial negative position consumes years of cash flow, but it also implies the ADU investment cannot be extracted until appreciation has been high enough to make it possible (this could also take years).My initial protege had a 1 BR garage conversion ADU that hands off would have been ~$100K (value just before COVID, it would cost more to build today). 

I may extract equity later through sale or refi. 3: Hopefully property will increase in value but I didn’t model it in since past returns don’t indicate future.

The question here is how should I leverage the equity I have built here - I could sell (also due to question #1) and reinvest the money else where OR extract equity out of this (HELOC or refi) and invest elsewhereI'm happy to clarify to help me get better answers.

Start with a simpler more cosmetic rehab to get some meaningful experience, as opposed to starting a top down renovation.

So the pattern is to keep the provisions for this type of property ownership on a short leash because of all the bad experiences residents have had with the slum next door.Therefore it is incumbent on us to establish a different narrative that shows how investors "invest" in communities rather than "extract" from them. 

$522 a month by itself isn't meaningful.