It recently had some roof and ceiling damage and we are looking to sell.  

So 20 year ground contact lumber is okay as long as it’s anchored by cement? 

I am undecided on if I long, medium-, or short-term rental is the best for me.

Many tenants just don't care about the property and many owners look the other way as long as rent is being paid.

The current area we are living in is very expensive (Boerne, TX) and is a heavily deed restricted region.

In terms of your grandfather living there as long as he's not the owner having a dwelling fire/rental property insurance policy is appropriate.As @Greg Scott pointed out he should have a renters insurance policy whether or not he's actually paying rent.In terms of liability coverage, that depends on what you have to protect so there's no one-size fits all approach.

Add a "Long Term Stay Policy", so a long-term guest would need to cancel a month ahead.  

The only thing we are a bit confused on is he said you can simply "back out" of the deal if you change our mind...but how would you just "back out" of the contract if there is nothing actually wrong with the home?

We are thinking that a Hipcamp would do very well because there aren't any good ones locally and we've already had success with short term rentals.The land is $125,000 and we don't have the financial ability to purchase it or do a down payment right now.

They are often classified as operating expenses or maintenance expenses rather than capital improvements (assets).Washer/Dryer/Stove/Refrigerator: These are assets as they are considered durable goods that will benefit the property over an extended period.New Baseboards/Trim, Doors: These are generally considered assets because they enhance the property's value and are not typically replaced frequently.Furnace/AC: These are significant components of the property and are categorized as assets due to their long-term benefit.Paint, Light Fixtures: These can be a bit nuanced.