This is DTLA 90004 zip code by Jeff.

This approach is dependent on zoning/code enforcement saying it's acceptable.As far as your numbers - apples to apples... if you do it as a MF, then your renovation costs are the MF costs, and the analysis is as a MF property..

This is a clear violation of the ethics code inspectors are required to abide by.

I don't think building code and energy code will come in at $100K for a house.

There is always risk but I strongly believe if you have done your homework, your property is up to code and you are a diligent landlord you have very little chance of having problems. 

If you assume she is being reasonable (in her own eyes) would this alter your actions and your "don't want to be taken as a fool" perspective? 

Have them sign paperwork that the systems are up to code. 

What if the house caught on fire at some point and was not repaired correctly or not to code?

If ownership of a community is running it only for maximum short term gain, homes will depreciate because people will be looking to leave.I would also concur with John on the hazards of pre HUD homes, and most of the time for anything build since the last major HUD Code revision.

This is determined by local market forces, so just ask your realtor to give you typical cap rates of a certain zip code.