Check your city's legal occupancy laws.  7 unrelated people in one dwelling is unlikely to comply. 

I suspect it has to do with the fact that if you are living on premises then they actually do feel that you and your other tenants should feel safer because of imminent and immediate perceived danger to the person who as a financial stake at the dwelling. you have a higher likelihood of getting  "beat up" by the convicted felon that is living on premises and if you are the breadwinner/property manager/owner/money machine that keeps everything operating you have a higher likelihood of this happening if you live there and they certainly don't want to mess that up.Follow the money.....look real close and it seems like it is geared more toward the "corporate" folks that own a series of large commercial buildings.

Maybe there is a statistic of what state carries the most multifamily dwellings. 

For my short term rental, I use Proper insurance, which includes loss of use and commercial liability coverage in addition to normal dwelling and contents coverage.  

Looking through the city code the best thing I can tell online is that R1-7 doesn't allow 2 dwelling units, but I don't see the wording about a workshop. 

Builders risks are relatively simple for single family dwellings.

@Maria De La Vega Typically in San Diego its 60 day notice for rent increase but there are exceptions that would require a 90 day notice....section 8 tenant is an exception or if you increase rent by more than 10% in a dwelling that does not fall under TPA.Best of luck!

"As of Dec 1 tenant 1 (Bob Smith) is removed from the lease dated XXX and waives any claims security deposit or any rights and access to the dwelling.

2) Can you build an 'accessory dwelling' on the property?  

When we do have kids, our plan is to look for a house that makes sense to build a detached accessory dwelling unit on the property.