As far as I know, it's still illegal under federal law to house a growing operation without proper licensing and the funding of one.

@Melanie KentWhat is your analysis on this dealLet’s see the numbers and margins....Cash flow - cash on cash return - Net Income - expenses - I mean these are basic numbers that if presented properly - may provide some incentive for other folks to collaborate a deal.

If you get the "stay" and the property is under court order, the court may require that the proceeds be placed in the registry of the court until proper ownership can be determined.

OMG, a long list, @Joshua Thompson.Schedules C with zero income and large expenses, particularly interest, taxes, and repairsFlips reported at gross profit instead of full selling price minus cost of goods soldFlips reported as short-term capital transactions on Schedule DSchedules E with zero income and large expensesSchedules E with repairs several times higher than the rentMissing depreciationLosses from rental properties or K1s not showing up on 1040 (not always a mistake, but often is)All expenses grouped into some $40,000 "miscellaneous business expenses"Missing deduction for use of a business vehiclethere are another 20-30 very common errors and oversights, soon to include the missing 20% QBI deduction.

It helps to make the paperwork more clear by setting up an LLC for the partnership and using the proper loan documents (lawyer can help with all that).

I would leave her on the M2M and follow through with a proper 30 days notice when the time comes. 

As a small time RE investor (two properties), I'm thinking it just makes the most sense to 'shift' some of the deductions I used to enter on a Sched A over to the Sched E because of the new rules/deductions with the Tax Cut & Jobs Act.

It will need to meet all fire and safety codes per your local building codes.Done properly a secondary unit in a SFH is the best method to generate positive cash flow on a otherwise underperforming asset..  

As previously stated, proper tenant screening and management (online bill pay) will resolve most if not all the issues you assume "requires nerves of steel" before they even start.So to reiterate, your advice is to do nothing and pay $3500/mo plus living expenses on $30k PRETAX income.

Get a good contractor and factor in permits (the city knows it has had a fire) proper remediation and rehab.