All of the above and there are many discussions and mathematical gymnastics that are in these forums that prove it works and doesnt work in both ways...consider a first position heloc if you want to utilize velocity banking concepts for mortgage purposes.I got one with CMG mortgage (they call it the All in One Loan) and it put me in positive light. 

Moreover, I would recommend prioritizing a W2 position over 1099 self-employment/sales for two reasons.

Additionally, the price point is still cheap enough to find the 1% rule and positive cash flow and it's super landlord friendly (so you will never have to go through a 12 month eviction or anything close to that!).

If you currently rent for $2,500 and take the $1,750; you have additional positive cash flow of $750 for your rent situation.Have you thoroughly looked over the capex potential issues? 

Quote from @Michael Challenger: I have no qualms with hard money lending, but I need to learn more about the process and structure to these for typical deals so that I am more comfortable and in a position to reduce my personal risk and risk to investors as much as possible.

Mostly people with minimal RE experience are adding a single ADU and they often make that choice based on cash flow without taking into account the negative equity position.  

By the way - for the same reason the 1st position lien holder will be uneasy with 100% CLTV, as a buyer I would be uneasy with it as well.

that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases:Class A Properties:Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.Vacancy Est: Historically 10%, 5% the more recent norm.Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.Class B Properties:Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 yearsClass C Properties:Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation.

The 1st position loan is paid off but has a second position heloc on the home with 50k balance.

Inflation will push up rents over time, so at some point you will be cash flow positive.