It's no different than those who hold stocks, then need to liquidate to purchase items.

My wife and I used to do flips in this area, and I have a couple listings along with long term rentals I manage in the area..For the co-host, they typically do not handle permitting and other items like that (this can be agreed upon between you and the co-host.

Clean it up a bit to get most bang for the buck add ons and preventative damage items like water leaks.

However, as you mentioned, the lender is referring to Fannie Mae guidelines that say PMI can't be removed until after a two-year seasoning period, even if the renovations themselves have lowered the LTV.Fannie Mae's Policy on PMI Removal: Generally, Fannie Mae guidelines allow for PMI removal if the LTV drops to 80% or below and the homeowner requests it after the loan has seasoned (usually 2 years).

Prepaid items are comprised of property taxes and insurance and prepaid interest.Property taxes and homeowners’ insurance will depend on whether or not you have an escrow account, when you are closing, and when those items are due.

Brick v.s siding and covered v.s no converted parking also make a large difference and are items that have to be adjusted for. 

If we need customized items, like a Leasehold DOT on an airplane hangar portfolio, then we (borrower) pay extra. 

We're wondering about various what-if's though, such as what if the people tear up the place, what if we don't want to rent to someone in particular due to references or credit or pets, etc.

Some counties in Indiana would refer to this as an Accessory Dwelling Unit. 

I'd recommend speaking to a referred lender to help you understand all of your options.