Rent existing South Pasadena home for around $3000 to support new mortgages and home equity loan paymentsRefinance new properties after a few years to pay off original home equity loan (at least partially)My partner and I move into original South Pasadena home after a few years to take advantage of good public schools, while the in-laws receive income from now fully-rented multifamily.ProfitIs this naive? 

These publications will give you a clearer picture of what is deductible on Schedule E.3. 

It is zoned public which means only 2 things are allowed.

Also helps to have easy access to public transit and/or highway.

If any one owner owns more than 10% of the units (depending on the total number of units) the condo could become non-warrantable.

Is that a violation of fair housing laws pertaining to discrimination against income source (I guess in reverse for non-section 8 applicants)?

If you use the 203k loan you do.If you get a conventional loan with low downpayment they will also typically require you to live in the home for 1 year unless you get a 20% down non-occupant loan.If you break out an FHA vs. a conventional owner-occupied loan they amount to close to the same thing.

A house owned for cash may under produce but it will almost never non-produce.But in order to completely avoid taxes on the boot in your 1031 why not purchase a second property as part of the 1031 using leverage. 

You have stable income that is a matter of public record and you are much easier to go after if you default.

These are small, non-warrantable studio condos, so no financing out there really.