The BRRRR is great, but typically does not go hand in hand with house hacking. 

While HMLs advertise Points & Interest rates, you'll see there are MANY more Fees associated with this type of loan product, in addition to a lien being placed on your property and a short timeline typically to operate within before they foreclose if you're not able to exit/repay the loan.

Typically No3.

- I realize that this maneuver will likely increase the risk of audit....curious to get a sense of how much more risk of audit I will face and does the IRS typically just audit the one year or would they dig into previous years as well?

Landlord determines the amount they want coverage for, typically the same as a traditional deposit. 

Worst case scenarios are like you pointed out, or there is a disagreement of the contract and you friend backs out.When you are renting it out, typically the owner (your friend) is responsible for taxes and insurance. 

Typical costs of the ADU is >$250/ft for new construction (converting existing space is cheaper).  

Typically, borrower cash outlays amount to a minimum of 10% of the loan amount for purchases (sometimes less for refinance loans).

Essentially, I am looking to take care of my properties early on rather than dealing with the problem later on.

Typically, lenders will pursue personal guarantees when the LLC is unable to fulfill its obligations, such as missed payments or defaulting on the loan.