I like the circuit and it doesnt seem that much harder than the current one. Would you recommend implementing something like this?
Yes, I recommend using opto drivers, especially if using one main Arduino that controls "dumb" (non-MCU) relay modules at various distant locations.
What do you mean on practical limit to how many relays I want to control like this?
I just meant that there's a practical limit on how many wires you'd have to deal with.
So in a 3 gang switch, I would need 1 x hot, 1 x adapter ground, 1 x arduino ground, 2 pins x 3 = 9 lines, its a shame cat 6 only has 8. Maybe i can send arduino things through cat 6 and external power supply through phone cable?
Yes, that's a good possibility. Also, the phone cable would be totally isolated from the cat6 (the cat6 wiring is the input side of the opto, the phone cable is the relay coil +DC and ground).
I am at a crossroads as the two most helpful people on this thread are giving differing advice.
Could use a hybrid solution. One master MCU communicating with slaves that cover an area (room or floor/level). Each slave MCU would would control how many relays are required for each area through cat6.
You'll need to think of your overall project and what's important ... future expansion, controlling other sensors, status indicators, installation issues, cost, reliability, safety, etc.