We have narrowed our search 2-3+ bedroom units/or duplex either set up with a mother-in-law suite or some other form of detached living from the main house to allow us to afford downtown living.

It could be an ADU, a mother-in-law suite above the garage, or a walk-out basement with a little kitchenette.

There is the potential for lawsuits if the bottom unit can’t stand the kids running and jumping.

You need a management LLC to protect yourself from a lawsuit, the LLC would be sued and not you personally.

Also you an attorney might be able to write you a letter stating that he believes you are not responsible for an monetary fees and that if they file a lawsuit you will counterclaim.

You probably won't live for free, but would most likely would cut your living costs in half with renting the other side and living comfortably with your family.The other option would be to be a large single family house that has a mother-in-law suite attached or the ability to wall off the basement and make it a separate rentable unit, I've found lots of houses like that here that have worked for me. 

You can keep considering SFR's and the pro's those come with b/c many SFR's are out there with either:1) completely separate built-in mother-in-law suite (say like one of my BHH investors lived in the apartment above the garage) or,2) a detached unit on the same lot (I did BHH deal with a small 2nd house in the back yard and the two houses even had separate yards & driveways).  

If you are sued and the judge believes you have pierced the veil, your personal assets could get throw into the lawsuit.

Which in essence, IS legally okay considering you are not on the hook for the loan per-se, however by walking away you would leave the seller high and dry which could lead to bash your reputation or possible lawsuit (of course, full disclosure is required but it does not negate the possibility).A key to all the above is DO YOUR DUE DILIGENCE of the area you are covering...

Anything you can work out in person will be 100% better than lawyers and lawsuits.