Personally, I would not want to live with or under my tenants.
Plan "B" could be to rent the first floor in a few years and move someplace out so that would not be a deal breaker for me.
Be sure to look at the parking. You probably have two cars, so with the tennants cars you may need 5 or 6 parking spaces. In some area apartments without parking can be very hard to rent.
And the seller did not fix that before putting the house on the market even though they did a lot of other work on the house. !!!!!!!!!!!
The property could use some updates to the detached garage (walls are wet inside),
That is a huge red flag that it is likely not a simple fix. Mold is a huge problem(google this) especially in a rental unit where you can be sued if one of your tennants gets sick.
While living there, I could make improvements to unit 1 while saving money - for investments,
Unless you are unemployed or retired and can work on it six days a week it is unlikely that doing any major work yourself will be cost effective by just doing it in the evenings and weekends. The problem is that if it takes two months to do then you will lose two months rent and if you hire someone to do it you may be able to take a tax deduction.
Listed Price: 350,000
Even allowing that you will be living in one unit you are still buying a small business that costs over a quarter of a million dollars. Treat it like a business and have firm a business plan including professional tax advice and several possible exit strategies. The way the taxes work out will likely make this work or not.
Generally speaking I like the general plan but it would be good to find ten good possible properties, run the detailed numbers on the best five, then if the numbers look good try to buy one of the top three depending on which house you can get the best deal on.
I have known people that would make a low offer letting the seller know that if the offer is not accepted that you would not make a counteroffer until you had also gone through the first offer process on the other two. You are basically setting up an auction in reverse to see which seller will sell for the lowest price.