My question however surrounds what personnel and paper work we will need to walk through to close this deal as we are in the very beginning negotiating phase right now.

Now, an illegal rental could be merely a mistake because there is paperwork and a fee that needs filed for every single rental. 

The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.

I am in the process of finding the original paperwork from purchase of the home to clarify my thoughts as I have been under the impression that we own the driveway and the neighbor has no rights to it.  

I looked through all my paperwork for a contract, but can't find one, but I am sure I signed something.

Section GThe homeowner insurance is listed as $424 per month and it looks like in this case pre-paying 5 months worth in this paperwork.

I had thought about contributing $200k capital and making the LLC taking a $300k loan from us, but based on my research, that will actually be a much more complicated transaction in terms of paperwork and tax filing. 

Think E*Trade or Fidelity with different paperwork.

I have a drawer over-stuffed with purchase and finance paperwork and insurance information, but I'm wondering if any of it actually necessary to keep on hand.

To actually win though, you will need to be looking relentlessly, have your mental model tuned to spot a good one very quickly, analysis tools ready to validate, and have the paperwork and confidence ready to bid immediately.