Once the project is complete, you determine market rate and buy out their share.Let's say it cost $60,000 to build the house and it is appraised for $120,000 after you are done (not including the land, which you already own).

I found a house that comes out to an IRR of 11-12% when I run the numbers.

Fantastic, We are currently house hacking it. with both other units it covers the mortgage and we get about $200 profit a month.

Now 10 years later there are luxury apartment & condo buildings, new construction homes, completely renovated homes etc in place of the old run down low income housing.

Too few details to answer (Of course this varies county by county, all questions could be answered by reading the (zoning)/building code and/or clarified with a visit to the county planning office).but some clarifications because: lots of things are "tiny homes" but what you describe small houses "on permanent foundations" needs to be clarified , tiny homes could be:-stick built, see below. check your county code/planning dept-stick built cabins/recreational, a specific zoning and potential occupancy/etc restrictions but worth looking into where the zoning allows for it -hud manufactured homes (smaller singlewide perhaps 400sq ft 600sq ft minimum)-non-hud park models (on axles), ansi standards- other "RV's" built on a chassis:  organizations, state agencies, etc - will certify factory built (or sometimes inspected professional built) tiny homes on chassis - to whatever standards ansi, riva, dot/ l&i?

I am looking at a house in that area as a buy and hold with a tenant already in place. 

I am  fairly new to real estate bought a town house in San Diego last year as a primary home.

That's what you will need to sell the house eventually.

My neighbor said on a face book town page - she was thinking of putting the house up for sale- She did not really did not want anyone in the house because she is a hoarder & had her special needs son living in the basement apt- with NO egress window ( against fire code) / I told her we could do the deal with lawyers - and save money on real estate agents (at that time the seller paid all commissions) How did you finance this deal?

You may not be able to get as much house for the same amount of money if you decide to buy another rental in the future but if you do your research and spend time searching you can still find good deals for similar properties.