Your insurance that you carry with an umbrella would be good enough.  

The risk with cash income (in my opinion) is to make sure it comes from legitimate sources and not something illicit such as drug dealing.

is it better to wait until the risks of increasing supply and economic slowdown subside? 

Based on the numbers you have shared it sounds like a very high risk project without much upside.

If the home isn't owner occupied, there's more risk to the insurer, so they need to know.

Multi family prices have been driven up to levels that certainly don't work for me but also don't seem  to account for the risk people are  taking.

Also, C properties are HIGH risk so you should be buying at near 6 or 7 cap rates AT THE LEAST.

We would have to pay 120K in extra interest and risk being over leveraged.

This would be a great thing because depending on the needs of the seller, 25-35k could go a long way(They'll most likely want a decent down payment if they're going to carry the contract.) 

This is more risk for property damage and the insurance company requires special policies for student rentals .