Even if the rental has a decent cash flow with additional flood insurance, we're still not sure we want to take on that risk as we are out-of-state investors (planning to move back to KY in the future, but not now) and we don't like that it will potentially bring down the perceived value when we try to sell it in the future.The seller has never lived there and has not provided any information on if it has flooded before or not. 

Nate and Jiries teaches how to capitalize on BRRRR, but they're constantly doing live feeds to answer questions for students, it's like you're constantly learning through case studies. 

In the area I lived the properties were too expensive (Watsonville CA) so I began doing farther searches out of my area.

I would like to offer a place to sleep in the living room but I'm not excited about the options I see for sofa beds or sleeping sofas.

The couple who lived right next door to our development have an old home that they rent out- it's about 1000sf on half an acre. 

What is the quickest and most feasible way to transition from living there to setting up this house for passive income: leaving a property manager or somebody to take care of it!

Quote from @Brandon Croucier: A DSCR Loan requires the property to be in LIVABLE CONDITION.Does it mean YOU would live in it?

Refi the house so they can continue to live in it, they will get the best loans on their primary residence.

I'm planning on buying a small multifamily first and foremost so I have a place to live and then will either buy a single family or another multi family depending on what I can find/fits my criteria at the time.

The single biggest advantage of selling your homestead is that you can take all the Cap gain tax free if you have lived in the home as your homestead for 2 of the last 5 years.