You are not ready to work with tenants if you do not know the laws that govern your business.

To start, the numbers:3 bedroom, 1.5 bath 1700 sq foot brick SFH with bonus room.Purchase Price: $59kAppraisal: $105k as is with estimated $124k after rehab.Renovation budget: $20k.Renovations include: new flooring in bonus room, kitchen and baths. total renovation of bathrooms, new cabinets, crown molding (to cover bad drywall job by previous owner), buff hard woods, paint exterior, paint interior, remove awning, remove side door and seal up, fix low spot in kitchen floor, and remove the non-permitted fire place.Estimated Rent: Initially I budgeted $950 per month based on another rental I own in a similar location, but  two houses on the same block were recently rented for $1200+.

Then I would probably explain to them it is the policy of the federal government to have those in residential neighborhoods so the City and/or HOA cannot stop them.

Rent existing South Pasadena home for around $3000 to support new mortgages and home equity loan paymentsRefinance new properties after a few years to pay off original home equity loan (at least partially)My partner and I move into original South Pasadena home after a few years to take advantage of good public schools, while the in-laws receive income from now fully-rented multifamily.ProfitIs this naive? 

These publications will give you a clearer picture of what is deductible on Schedule E.3. 

It is zoned public which means only 2 things are allowed.

Also helps to have easy access to public transit and/or highway.

If any one owner owns more than 10% of the units (depending on the total number of units) the condo could become non-warrantable.

Is that a violation of fair housing laws pertaining to discrimination against income source (I guess in reverse for non-section 8 applicants)?

If you use the 203k loan you do.If you get a conventional loan with low downpayment they will also typically require you to live in the home for 1 year unless you get a 20% down non-occupant loan.If you break out an FHA vs. a conventional owner-occupied loan they amount to close to the same thing.