In terms of the math, let's look at return from rental income and return for equity:For each item, calculate a year's return, and there's your approximate ROIFor the ADU conversion: ($4000/month x 12 months)/$500,000 cost = $48,000/$500,000 = 9.6%That's before expenses, which will cut that number down by several points.

They're so expensive, but I'm having trouble finding an insurance provider for short term rentals.

On average, at least with today's numbers, to get $70-80K net in your wallet every year, you'd need a $800K to $1 million property that is completely paid-for. 

Having rental income cover my living expenses.

As an aside I buy properties I can fix up upon the initial purchase or shortly thereafter so as to minimize future expenses.

Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.California is generally more cumbersome than other states when it comes to taxes and filings.

According to the prelim study, 78% remains in 39-year MACRS and the balance amounts to a $200K increase in our depreciation expense this year (catch up from foregone depreciation since 2011), which is an estimated tax savings this year of $65K.

If you are going to increase rent I find it best to do so where the new rent is still "under market" and it would still be more expensive for them to leave and move than to pay the increase and they still feel that they are getting a bargin.  

It's a smart way to reduce or even eliminate your own living expenses while gaining investment experience.

Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.