@Sasan Nemabakhsh...Feel free to take what I'm going to respond with a grain of salt, and while not exactly the same, I've worked on some hospitality construction financing, and the lender I've placed with has appetite for ALF construction.I don't know about construction cap, but end should be running at a 8ish, on ALF, from my knowledge.You should definitely get a 3rd party feasibility study done to determine the answer to the question of market due diligence.  

Any suggestions on how I can restructure this deal and really make this work, I really want his home he's moving out of state and wants it gone.

You could try it but i'd suggest your "Plan B" include having the funds to pay off the entire note before the lender forecloses.

Any suggestions?

Closed in October 2013 at $152,000Over the next few years, I made some additions and repairs (new bedroom, bathroom, and extra kitchen in the basement), and now got two housemates - completely covered my mortgage payments.2015 rolls around and I start studying real estate a little bit more.

We would suggest constant communication and review of budget status as you go along- weekly at minimum.  

Any other suggestions or concerns to deal with should I decide to try and work with the current tenants. rates are $1000 and $900 each.

@Antoine Martel @Gay Lloyd  I am not a lawyer, but you really need to study up on this before you give advice that can really get someone in trouble.  

Thanks for the suggestion.

Please post suggestions if you can recommend someone!