With 8 units that is potentially $50,000 per unit.

With similar 3 story properties reaching 600k you can see huge potential this presented.

My preference is to actually have to separated as cost efficiently as possible, but also wouldnt mind the ADU and main house shared meters as this would save me costs on my initial construction. 

I believe alot of owners in the area are under insured especially when it comes to loss of income and rebuild costs. 

Despite offering above the asking price, I'm consistently missing out on potential deals.

- Is there a potential zoning issue (property is residential single family)?

This is tough.Depends on how fuzzy you want the business/family line to be.The only thing I'd be absolutely sure of is that your money has more tangible security than being a "personal loan" EVEN IF you cut him a break on cost. 

Investing with foreknowledge that property values are falling seems like a timing problem or at least a situation where my offer would be reduced to reflect this coming change.As to how much to put in as a down payment that depends more on your numbers, your risk tolerance, ability to get financing, cost of financing, etc. 

Just found a potential way to get started.

We have struggled for years deciding whether to sell or hold because the tax implication to sell is very costly.