I have an inspection scheduled for tomorrow for the termites, but he said without tearing back walls it's tough to know whether they're active or not. 

It's the visual thing for some people mostly, with such small wall space having it right there in your face isn't ideal. when at all possible, every flip will just get duct work and standard air conditioning. 

When you start opening walls, a lot of issues that, based on the visible condition of the house, were assumed to not be present, are.Bids coming in over budget

I had one friend who tried this and finally went to go visit the property and it had holes in the walls etc that the contractor never fixed but they did not know it until they visited

But the Wall Street Journal had a favorable feature on him in July. 

(A) For an accessory dwelling unit described in subparagraph (A) of paragraph (1) of subdivision (e), a local agency, special district, or water corporation shall not require the applicant to install a new or separate utility connection directly between the accessory dwelling unit and the utility or impose a related connection fee or capacity charge, unless the accessory dwelling unit was constructed with a new single-family dwelling. home."

A key improvement was removing a wall to create a larger, open space, significantly boosting its rental potential.

What is your comfort level on construction - cosmetic, mid-level or gut to the walls?

Quote from @Jaron Walling: Depends on how much capital you're trapping to generate that return. 

A landscape contractor that specializes in retaining walls can replace a resting wall if you have one that I don’t see in the photo.