If the code does not allow for construction of yet another living unit call it an ADU, or just permit this 2nd above a garage space as an Art Studio or other area. 

Dealing with the City and permits is always a challenge.

If you're going after workers, they sometimes clear out in December and January so be aware of the possible lapse in cashflow.Building can be anywhere from$12k to $25k more per space from permitting to being rent ready. 

In my city we have to get a permit to do that. 

I found one lot that has this possibility but the owner didn't get permits.

At most do some painting, maybe refinish the floors, change out the locks and call it a day.The first investment really is like your learners permit. 

I’m concerned about rehab headaches in dealing with the city, pulling permits and funding it.

Ducts, permits, wiring etc etc.

You can't just get a bulldozer and start knocking down trees and move dirt around.Usually, before a person buys land they make an Offer To Purchase and the closing of escrow is contingent upon getting building permits and your building department's approval to develop the property.

Not to mention things like utilities, permits, materials and people not showing up.