Gaps in rent payments or undisclosed tenant issues should have been red flags.It’s good to see the OP trying to help their client navigate this, as acting promptly is critical for any chance of recovery.

You’ll find properties specifically zoned for short-term use, which makes your life so much easier.

Here is a list of what adding ADUs, especially in single family zoned areas,  in my CA market is typically a poor RE investment:1) The value added by the ADU addition is often significantly less than the cost of adding the ADU.

I thought 1 per year was enough to push me out of my comfort zone, but also not too much to overextend my finances. 

This includes zoning laws, property taxes, and any other legal aspects pertinent to your area.

Things are very different now and it is what it is.There are a lot of regs on STRs in Colorado Springs - https://coloradosprings.gov/strEssentially STRs are only allowed in certain zoned areas. 

On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.c) how open to scrutiny are they?

A common strategy used by investors, such as those operating through PadSplit, involves purchasing the property, completing basic rehab, refinancing, and then using cash for the interior build-out.Another potential red flag, even without converting common areas, is the addition of individual locks on bedroom doors.

Housing shortages have more to do with boomers living longer and holding on to their large homes and provincial red tape.

One market shift and you're in the RED.