The down side is it takes me 18 months from start to finish but I end up with so much equity day one it's worth it.

I lived off the cashflow from just two free and clear studios for a year. yea when we are growing up we care more about risk than return, I'm caring more into my downside protection for risk management rather than continuing multi asset leverage which can be dangerous if the market changes. 

The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC.

The years it takes to do that I could already do these single one off projects and be much further ahead in return.The larger projects tend to take longer and have more downside risk if the economy changes.

Let's you take advantage of rising market while limits your downside ...

The downside is for brand new entities, loan sanction would be tough.

I'm wondering if anyone has seen success in this sort of investment and what potential down-sides there might be with building a 2nd unit on your properties. 

Investing in a single family home is how most people get started, but doing so today in a market like the Bay Area is a "low-upside, high-downside" potential investment, which you would never want to do.  

That is the down-side to using an entity to hold properties.  

Too much money tied up, too little upside, too much potential downside in this old house.