Scenario 1 looks promising if you can pull it off - but sounds like a sticky and complicated situation with a lot of moving pieces and potential for things to go wrong (lawsuits, disputes). 

Houses that are already finished might advertise an in-law suite. 

For anyone who has rented by the room, how do you make sure you don't get caught on the wrong end of a fair housing lawsuit?

I also look for lawsuits and see what happened in them.

It's not one single family but rather 2 single families each with an accessory dwelling unit (ADU) or mother in law suite.

If the risk is making the payments, then again that's where the tenant's money comes in.Now, if you have negative CF and a loan, then you are committing financial suicide.The discussion here is the math issue, and the math says, "use the debt".What is a worse/better situation/risk to be in:1 - Pay all cash for a property, an have to wait 10 plus years before you recover your cost and start to make a profit, and have 100% of your property exposed and at risk of losing it to a lawsuit, or...2 - Pay only 20% for that same property, take less than 2 years to recover your cost and start making a profit,  have 80% of it under a lien which protects the property from a lawsuit since only 20% of the property is exposed....and it most certainly does matter where the money comes from to pay for the property. 

Also runs background check on this person for pending lawsuits, I don’t care how well you know them.5.

He was involved in a local case where there was a lawsuit and counter suit.

Also be sure to purchase an "umbrella policy" for extra protection against lawsuits.

They're also one of the Real Estate brands currently facing multiple class-action lawsuits for... being what Keller Williams is.