Maybe you could find one with a mother in law suit or make a mother in law suit.

It would be quite a feat for a lawsuit to have enough steam to go through all of that. 

If yes, then as between (1) and (3), I see (1) as potentially advantageous if you're going to have many separate deals for which you want to limit liability (either because you're worried about lawsuits or because you want to arrange for mortgage financing). 

Although it is quite simple to compile documentation that will get you past the State Corporation Commission, that does not mean such documentation will protect you in the event of a lawsuit, or that such documentation is maximizing the amount of utility and equity you may be able to achieve with your business organization.It is never a good idea to work on legal matters DIY.

What if some contractors did work without the proper insurance, how to protect from future lawsuits?

Degree faces a BIG lawsuit, but less than the Umbrella Policy.

You may end up in a stalemate, a lawsuit, or selling you interest to him at a large discount.  

I'd suggest teaming up with someone who knows what they are doing and can see around corners to avoid lawsuits, wasting seller's time and wasting your time on deals that may not work.

I own in both LLC's and my name, and at the end of the day a good insurance policy is always first with financing in place being a close second in acting as a deterrent to lawsuits.  

It is worth at least an initial consultation with a real estate attorney.If I was in your situation, I'd probably make two nice up and down townhouses with the bottom units being "mother in law" suites with separate entrances.