According to our understanding:1) California does not recognize REP status, but we could claim it on our federal taxes, is this correct ?

In that case you might save taxes building with them.

Also, I believe the tax benefits are horrible compared to the states, but I'm not too sure.

@Jeanette LandI always recommend using a tax professional.

If I have no mortgage the cash flow is more secure.

Look for a place where you can secure items that you do not want tenants to have access to. 

However, this means you’ll need to comply with the annual filing, franchise tax, and reporting requirements in both states.

We don’t try further diversification by investing in residential mortgage loans, mortgage loans secured by property outside the U.S., loans not secured by real estate, or loans secured by farmland, recreational land, or oil and gas ,mining.  

You could structure the deal as an installment sale or a lease option so the property owner doesn't see a large capital gain tax payment for the sale.And good on you for helping out!

Additionally, the property includes an outdoor swimming pool.The use of the accelerated depreciation strategy helps real estate investors to reduce the tax liability immediately which therefore increases their bottom line due to the offsetting of income.