Not sure if I could get in trouble by a legal standpoint considering she is not part of the lease agreement.    

I would like to be able to get as much done as possible and even be able to start construction on the day of settlement.Pre-Hab Work PhaseHire architectHire structural engineerApply for building permitsDesign KitchenChoose tile, flooring, cabinets, door hardware, light fixtures, railings, front doors.Measure windowsGet estimates from 3 GCsGet estimates from 1-2 ECsGet estimates from 1-2 PlumbersI think I might be jumping the gun on getting Permits…don’t you have to own the building for that?

Private lender is as  @Rick Pozos  pointed out some one you meet at a gathering has no business card is a local professional with usually a few hundred grand in their IRA  and for those folks most states have a small carve out to do a few private loans legally.. 

In addition to the bedroom/bathroom work, we also added a covered front porch without a permit that we planned to disclose on the sellers disclosure at the time of sale rather than getting permitted.

Banks decline people that are self-employed, not because their tax returns are too complicated, but because they take massive deductions (legal, I know) which reduces their adjusted gross income.Incidentally, banks turn down W2 borrowers that take massive deductions for business related expenses which also reduces their adjusted gross income.I would suggest you look on BP to find an investor friendly local lender that you can sit down and have a coffee with. 

There are plenty of legal, profitable investments to be made.

I did a quick research and it seems many people are doing it and there isn't anything wrong ethically or legally, so is there something wrong in subletting for profits that I'm missing?

We would then rent both units out.For Wisconsin landlords, is there any licensure that we would need in order to legally rent out a property we own?

My analysis is similar to what @Dan Heuschele          FYI: I went to The City of Vista meeting two weeks ago and they are considering reducing permit fees on Granny and Second Unit (Granny with Kitchen).   

My plan is to secure the permits for the lot split and the new construction before I approach a builder.