He said he has already been approved for a construction loan of that size.

If not, just look around locally and see if you can get approved before you do anything else.  

Look for 1 bedroom/2bathroom or 2/2 cabins.1/2 cabins will often rent like a 2/2 but only be approved for a 1 bedroom septic.

Either it's paying down debt or earning more money somewhere else.  

The biggest issue that I'm finding for getting approved is my employment history as I recently started a company within the Real estate investing and property management industry.  

I have some very bad tenants who are not only not paying rent but they are bringing all kinds of trouble to a very nice residential street.. subleasing my house where my lease clearly states no subleasing of any sort - They already acknowledged while I was away for a year due to Covid they had brought in another person who is not on the lease and I never approved off to live there permanently..They are bringing in prostitution!

I would have a lien on the property then have to subdivide and then get approval from the lender who has my mortgage wouldn’t I?

I'm not aware of any SBA lender that would approve a commercial loan with 0% down3.

When I got pre approved 2 months ago the purchase rate was 4.75 so it had a recent steep decrease so these numbers can change fast.  

But if the deal works without the third unit being added then sounds like a good deal and if the city approves that third unit then it must be a homerun.