Essentially, terms were prime +1 interest only for 12 months with only 1 discount point.

My questions are:- is it worth investing there in terms of the safety of tenants?

Operations- tenants refusals, either cull them before they get to you by requiring autopay as an example, document on their application why you refused them, make sure your facilities are maintained properly and no safety hazards exist, etcLLC.

What steps, resources, or preparations would be essential to make this a successful venture?

The 1% rule is essentially not going to happen in most markets, unless you are in the midwest or more rural/LCOL areas. 

The difference between a safety line and a safety net is that a safety net (your words) can break one line and still hold a fish. 

But yeah, essentially what others have said above.

I really like most of my tenants and I would never want them to feel threatened or to feel that I view them as a threat to my safety (if I felt that way, I wouldn't have rented to them.)

Definitely go the legal route here, don't rent out the basement unless you have the OK from the relevant authorities--it's regulated for a reason (fire safety, carbon monoxide poisoning, etc.) and your insurance will not have your back if something goes wrong.

Eventually, the supply of essentially free house and/or suckers runs out, or law enforcement catches on, or some combination of those factors.