However, finding properties that would cash flow with a 20-25% down payment on 400k property has been challenging.

I need some advise from you all before i move forward.How do you make the mortgage payment?

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I do not understand your remark as related to the DSCR loan.  2 ADUs are not allowed by f/f conventional financing but is not always enforced.Fortunately if you stay with the current tenant without a refi, by the time you pay principle it is likely the rent will have increased enough to absorb the increase mortgage payment. 

This would pay us back less than we were owed but still enough to come out whole.We all tried to negotiate a short payoff with the second-position lender, who foolishly demanded payment in full.

In this case, since they are borrowing their payments, these would get added to the principal balance each month, and interest would be calculated on that.If, for example, the interest rate on the note were 10%, they would implicitly be borrowing their payments at that rate.

Payment TermsContract Value: $[Insert Amount].Deposit: $[Insert Amount] due before the commencement of work.Payment Schedule: Payments to be made as follows:[Milestone 1 and payment amount].

House hacking is an excellent strategy, especially with the potential to use an FHA loan to secure a property with a low down payment. 

I financed this property using down payment funds from 403B and a local commercial bank.

Easy Street is a good option BUT you need CASH in liquid checking/savings for down payment of 20% and BIG chunk 2-3 times loan amount to buy out of a prepayment penalty.