My goals are to make sure that the contracts that I write out protect me and my investors in all areas and to make sure that the homebuilder and/or contractor does not screw me over in any way shape or form.

My question is how do I protect my interest or structure the contract so I don't leave myself open if something should go wrong?

LLCs are generally for one real thing - personal asset protection.

We are looking for business general liability insurance to protect the owners.

This will protect from the due on sale clause if it is a fannie/Freddie loan

I wanted to make sure I organize the new townhomes so that I have maximum tax benefit and legal protection.

Most PM’s provide before and after pictures for maintenance for both the owners protection as well as for the PMs protection.

A lot can change over time just make sure that agreement is clear it is there to protect both of you!

Is there any reason for RE investor to set up an LLC in CA considering the cost and stronger protection in TX?  

What you want to protect is your exposure to liability from a lawsuit by the tenant or someone else.