It can definitely get interesting from a practical perspective. In my experience, in this area (and I’ve had an interest in these types of private set ups here for well over 30 yrs now), it simply varies by town. Where I grew up, in the city, two, three, and up to six family houses were the norm. On my father’s side of the family, they all had them and all the living spaces were occupied by family. They all remained super close, some of them even buying vacation homes out of state together. On my mother’s side, her mother lived in a six family house which was actually very beautiful when you really looked at the ornate woodwork inside, and they were quite spacious, built in the nineteenth century when this sort of thing was more common in the cities, no doubt. (She later moved to senior housing when she could no longer climb three flights of stairs.) Everyone else in my mother’s family went on to do pretty well for themselves, get married, and buy single family homes, most still in the city.
When we first began contemplating building an in-law apt onto our house (which is also relatively small), we had a lot of hoops we had to jump through where we live. It was frustrating because we knew others in different areas who had few rules about adding on, and/or some just did things by skirting the rules. I wanted ours all done legally in case we had a fire or something (and we did, not to the in-law but another part of the house, but let me tell you, the house was scrutinized, as were our credit and finances, etc.), so we did what we had to do.
The way it worked where we are (or at least how it was then; it could be different now, Idk), was that, the rules stated you could [legally] put an in-law apt into an already existing space, so you could put a kitchen in (which is the really important thing for people, besides a bedroom, bathroom and some living space, so everyone can be happy) and that was fine (if you had a workable space). IF you built onto the house, it couldn’t become a legal in-law space for three years, so no kitchen in a new space.

Ik, seems like a weird rule, and I guess it’s because they don’t want everyone building these spaces on willy-nilly they they can rent out or what not. (Because legally, it can be rented out if done right.) So we were able to build the space but not put a kitchen in for three years. Mom made due with a fridge, microwave, coffee pot, and a bathroom sink for that time, but the full kitchen didn’t go in until the time was up. (She could also use our kitchen or we shared meals, so it wasn’t a huge deal.) I know people in the same area we live who built on and put the kitchen in right away, too. I guess it depends on your comfort level. I’ve talked to a lot of people who live elsewhere and they seemed to have an easier time of it, too. We also had to attest every year that we had a relative living there. It’s ok to rent it to a non-relative, but I guess they want to know about it. (We haven’t rented it so it’s been a moot point for us so far.)
The other big question that comes up is, who pays for it? In our case, Mom paid for it via the sale of her house, but once here, she didn’t have to pay for anything else other than a few personal bills like her health and car insurance, and groceries, etc. We continued to pay all utilities, cable, taxes, etc. (Over 25 yrs, I think she made out on the deal, put it that way.) Going into it we didn’t have a crystal ball so we didn’t know if she’d be hear five years, or twenty five. Honestly, it didn’t matter. But as soon as it was built, our taxes and utilities shot up, that’s for sure! Lol. Long term, it has added value onto our home, so it’s all good. (We may even be the ones using it some day!)
I know you have family in construction, so you know it better than I do, but I had an architect friend, so we had plans drawn up (which worked out great, as we made the whole thing handicapped accessible, which we didn’t need until the last year of Mom’s life, but when we needed it, it was really nice to have) and got three estimates, and even back then, they seemed high. (One was a friend, too. And of course, I was trying my best to do this as economically as possible.) During that time I happened to be getting a kitchen floor installed, and happened to mention to the man doing it what our plans were. He said he was a builder, but took on some of these small jobs during the winter, and he wanted to bid on it. His bid came back quite a bit lower, still using quality materials, so I was a little unsure about whether the quality of his work would be good. So I went and looked at some of the local building work he’d done for others, and not only was his work really good, the people sang his praises. So we went with him, and he did an amazing job. (The reason his costs were lower was that he mainly worked with just one other guy. So it took a little longer, but I was glad he did the work, and it saved Mom about $20K. He later built another room onto our house, for us, and again, amazing work.) Lesson for me: It’s good to shop around.
I’ve seem some really nice in-law set ups in other homes. When we were looking at houses to buy (we‘re still in our first), we did look at some with in-law set ups already, but Mom wasn’t ready for that step at that point, so we let it go. I think it was probably more difficult to go through the building process than it would’ve been to just move into a house with [a nice] one already there [one we viewed was a mess and I wouldn’t have wanted that for Mom or for us]. But it worked out in the end. From where we live it was easy for Mom to drive to stores and to church without a lot of difficulty or getting lost. Our house probably became a little small for us, but we stayed because of the in-law. I have recommended to people I know who could benefit from such an arrangement to consider selling one house and doing the same - building on to the other (one in particular I’m thinking of has the perfect set up with a lot of land and an easy style that would look great with an addition, etc.). I would also suggest in that case that they should probably see a lawyer first if there will be issues about ownership in that case, such as a young family selling their house or whatever. It can get tricky when others are involved who may hold resentment or whatever.
Probably too long, but just wanted to throw some of this out there in case there are people thinking about this seriously. Oh, and I forgot to say, I looked at every option for Mom besides building an in-law apt. A condo near us would’ve been nice, but she couldn’t afford the bills every month on her limited income. And senior housing wasn’t an option because of the money she had from the sale of her house. She was also fairly young at that time (69) but still working and, as I mentioned before, in a bad situation living by herself in a house that she couldn’t keep up with and nefarious people around her where she was. I imagine there are a lot of people in similar situations today, but costs are even more crazy now than they were then.