Others may disagree but when your young its wise to create a fail safe.

My read on most of this is that it already fits code-wise. 

It might be wise to put in the sale agreement that you want tenants out before purchase. 

My question is, tax wise how does it work?

What do I need to be doing to make sure I’m covered as much as possible liability wise here?

My goal is to cash out now and invest wisely rather than wait till I'm really old to see any kind of financial benefits and gains.

@David Mikolajewski Real private lenders such as you described (private individuals not associated with a company) are not out there sending unsolicited emails to borrowers they don’t know asking them to borrow their money.So, to answer your question, no - that’s not how it’s typically done, and you’re wise to be concerned about these suspicious/unsolicited emails. 

Having said that, you want to find out what your Housing Authority provides as a remedy and play your cards wisely.  

Don't be "penny wise and pound foolish" here. 

We paid off our house last year and pulled money out of my retirement account to do that (which I realize now wasn't a wise choice, in terms of using our retirement money).