In both scenarios, I will use the equity in my first rental via HELOC to either cover the conventional loan's down payment and fund the rehab or to fund the hard money down payment and meet the reserve capital requirements.

Paid off HELOC and put $100k in pocket.

Just used my heloc from primary 100k to purchase c class 3/1.

If something happened while other loans are out I would have to pull $27k from a Heloc to cover the difference. 

Make sure you know the value the ADU will add to the property before building the ADU. 2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc).

This will produce a lower monthly payment due on the HELOC and lower interest, thereby paying of the HELOC faster, and opening up more available credit for you to tap for a project you have in mind?

I do have one house hacking client where I sold his condo and then helped him buy a larger townhouse where he can do forced appreciation through rehab (which worked out really well.)I went from a house hacking condo, used a HELOC and then did the FHA 203(k) to a house and built an ADU.Because of the rental restrictions, it might make sense to sell at some point since profits up to $250K is tax free and scale up that way. 

Consider banking your $170k that would pay off the mortgage and apply for a HELOC for the remainder of your equity to 75%.

We are going to be taking out some equity, no not a heloc, so that we can do some remodeling on our personal residence kitchen.  

Thank you all for reminding me and stopping my second guessing of myself.It's paid off and I have a HELOC on it in place.