I really like it other than the cracks in the one side of the basement. 

where you could find a tiny 2 bed for just slightly above your budget, but you would be able to get rent about 50% higher than the areas you mentioned. 

It wouldn't surprise me to see the governing bodies come in and start cracking down on STRs at some point.That being said, if you have a backup plan in case STRs do start getting shut down then you're in a much better place.

Make a small addition to the main house (-> results in 1250 sf 3/2), do a full gut remodel and new roof framing/roof, and convert the existing 16x25 garage to a tiny 1-bedroom.

Your intermediary should have told you that the issue is how that tiny home is taxed. 

My question is:1) Does anyone have experience with a tiny mini storage facility and whats your thoughts on risk & return?

Lived in his tiny dorm room and wasn't an issue.

Plan was to develop it into a tiny home and Airbnb it….

Conventional lenders (who have lower rates) won't do tiny loans - hits on the back side of head with government high cost loans.

The going advice and what Avery Carl actually promotes in her STR book of buying a vacation home and then airbnbing it is being cracked down on by Fannie Mae & Freddie Mac.