I have also partnered where I put up the money and get a guaranteed rate of return and a portion of the profit.  

This would qualify even if the portion used for investment is a part of the main living space, because even though it's being used for investment it still qualifies as your primary residence.

I read somewhere I could 1031 the portion of the property that I’m renting (ADU), and pay capital gains tax as normal on the portion I’m living in?

When I confronted them, they defended their quote, stating that they go off the industry standard and a portion of the labor time is for "testing the system after repairs to ensure safety."

I did rent by the room for my first property and was able to cover a big portion of my mortgage by house-hacking. 

Lastly, simply raising the rent to cover the water bill seems like the easiest, however, should their portion of the bill exceed the amount I increase their rent by, then it'd be out of my pocket.I'm kind of at a crossroads here with making a decision and want to hear anyone's experience regarding the topic.

When doing BRRRRs OOS, having the right team in place is vital.

.- lower turnover- easier on the units when they do move- quiet and less disturbance than traditional, younger- for fixed income, consider partnering with the local housing authority for SEct 8 vouchers, then raise rents accordingly - guaranteed money & the Sr. only pays a portion (if they qualify)Traditional renters- Higher turnover- Higher turn costs- More volatile - higher bad debt- More drug related activities- Adding in children that are hard on units- Higher eviction rates and legal costsConsider all angles before making a decision with the changes. 

The plan: I am identifying on/off market properties that are targets, will do all of the real estate work (listing, showing, advertising, vetting, etc) and will split the cost of the purchase of the home and the material costs for any needed repairs.The contractor will be subbing out portions of the job and be on site mostly full time until the project is completed. 

Another option is finding a deal where the owner will seller finance some or all of the down payment portion and is okay being in 2nd position.