Aside from whether it’s doable, is it ethical and/or legal?

The use of a legal document that relieves you of any responsibility and the fact they are totally responsible for anything related to it would be a good thing to have. 

However, it wasn't clear if that was only for tenants on a month-to-month lease without a defined lease termination date (which is what our leases are based on).I would certainly appreciate any insight on legal requirements surrounding notice period on raising rents in Colorado.

I can't speak to all the legalities, nor the agreement you signed, but you should have insurance on the property anyway.

Then at the close of business on the 1st they would tape a note over the drop box stating that rent was now late and that only certified funds in the amount of rent+water+filing/legal fees would be accepted.

In my opinion, this process is legalized extortion. 

In my area I see a lot of "Mother In-Law" apartments and other non-legal 1 bedroom tack ons... often these are garage conversions. 

I am guessing that they will suggest that you require the Tenant to have:- General Liability (1,000,000/occurance)- Umbrella Liability ($1mm or more)- Professional Liabiity ($1mm or more)- Tenants Legal Liability ($500,000 or $1mm)-  Abuse/Molestation covered under the Liability or as a separate limit)- Business Auto Liability ($1mm)- Workers Compensation & employers Liabiltiy- If they paid to make modifications to the property to be able to operate (ie. ramps, special doors, etc.) they may need Additions & Alterations coverage depending on what your lease says on who owns those.They will probably seek to add requirements that shift the burden of Insurance to the tennant for something that you both get drawn into.  

@Jeremy Woods if we really want to get in the weeds...An LLC owner can be held personally liable if he or she: personally and directly injures someonepersonally guarantees a bank loan or a business debt on which the LLC defaultsfails to deposit taxes withheld from employees' wagesintentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, ortreats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.Wouldn't buying in your name then transferring to the LLC meet the two bold comments?

You can also ask for documentation from a doctor regarding the “service animal.”