We want to even the floor up to the same level as main house and are unsure if we should request a permit for it. 

This actually helps out, since the dirt is drier and we can dig further down, prior to hitting the creek level.  

The income will presumably be offset by the losses (depending on level of losses and income)

Everything that goes right or wrong is all on you.The advantage of buying an existing business is that if you do it right, you get to stand on the shoulders of giants to take it to the next level.  

I do only rental rehabs taking a 1975+ split level 3/2 and just causemetic;  paint, fixtures, flooring, new HVAC, rarely a roof, never windows,  paint the kitchen cabinets with new hardware, clean up baths, just clean up landscaping, fix things beyond replacing all ceiling and plumbing fixtures (except shower valves) and this has grown to $25k is now tight

Bigger Pockets has some good state specific forums and many of these questions are best answered on a local level.  

I got all the construction knowledge, now I need to blossom that into the next level.

Yes, but you need to narrow it down a lot to have a coherent answer.You will have to look at (I'd recommend in this order) the city codes (if it's inside a city, many cities above 50-100k population aren't friendly to development of these), the county codes (most counties are friendly to these, but you will probably have significant issues in major counties like Bexar, Travis, Dallas, Denton, Tarrant, Harris, etc), then you will have to comply with the state-level (TCEQ and others) on the water supply and waste water treatment systems.To put it in perspective again, in say Dallas or Austin, you will likely have prohibitions or very significant hurdles on developing RV or tiny home properties even on unincorporated, "unrestricted," AG-zoned properties at both the city/municipal level and county level.

It also rules out some pretty nice areas that happen to be located on the edge of zip codes that would otherwise be C areas.I guess my general point is that zip code level analysis can be interesting, but isn't terribly effective for picking the best neighborhoods to invest in, or at least not here in San Antonio.

Talk to at least 2-3 lenders because they aren't all of the same skill level and you may find one that you personally mesh with better.