she had it rented out (kind of) and because she's living out of town and so much work needs to be done and she can never do it. 

Hello biggerpockets,I am trying to understand all the potential *legal* issues I can run into by trying to split a regular single family home that is zoned as such into essentially a duplex with 2 separate tenants, one living in the house and the other in the basement.

The advantage you have living in SD for 15 years is knowing neighborhoods,which ones are improving, where you will like to live, and which will attract good tenants. 

I would focus on finding a solid property in a solid location with tenants you don’t mind living with, force some appreciation through repairs or something like that, let time do its thing and then scale up if you want to.  

New buyers who figure they can suck cash flow out of a property to live on creating a house of cards is a potential Ponzi and if unsuspecting and unsophisticated sellers are involved and a little fraud happens then where is the line?

We received the Judgment against the tenants who continue to live rent free in the property.

You should be able to live a couple months on a credit card or have a paid off car you can sell. 

People need places to live and as long as people aren't moving out of the area in large numbers, run the numbers and see if they work for you. 

I have invested my life savings in real estate to earn a living, save for retirement and build wealth for my family.

The second personal residence that I bought was a two unit and lived I one and rented the other.