Quote from @Clay Watson: I'd suggest checking with a few more lenders to see if they have the same restrictions or if you can find a better deal. 

If i paid off my first rental, it would bring in $2750/mn (before quarterly taxes/expenses) and then i would have a bucket of equity to tap into if i ever wanted to buy more property.

They can build an inexpensive Manager's living quarters and live there, saving on buying a residence. 

That includes the mortgage, the insurance, if there is any electricity the landlord is responsible for, if the landlord is responsible for any of the water and sewer, not all of those bills might be every month, some might be quarterly or twice a year like the insurance, and a small percentage set aside each month for vacancies, maintenance, and eventual capital repairs.

Quote from @Clay Watson: Sure, you can sub to an existing property you own that is currently owner financed.

It's a MIL apartment down in the lower quarter.  

So, yeah, they're looking at a quarter of the pie, not a third.

I have a rental property in La Verne that would be perfect for this (complete with ancient clay sewer line due for a replacement).

I won't be itemizing, so the quarter we occupy will not be deductible this year.

This is a bid to pipe burst and replace the old clay pipe with one piece seamless brand new pipe.