Is there a reason that you want to keep the ISP router in the network? If it is required or has some special features, it is fine to leave it there, but if not, it is just adding complications to your network because it is serving as a gateway/router and switch, but not a DHCP server for your network
How are you connecting router 1 to router 2? if it is Router 1 LAN > Router 2 WAN, the network will not function with the existing network addresses. You will either need to bypass the actual routing functions on router 2, or change the address range of router 2 to something other than what is on router 1 (so maybe 192.168.2.0/24). But if you are connecting LAN > LAN, it is ok in terms of the address space.
As @mk24 mentioned, the guest network must be on a separate subnet -- you should do this with VLANs.
I assume you mean Physical ports... yes, it can work, provided that you are connecting LAN > LAN between the routers. But this isn't the best configuration... more comments further down.
IF router 1 and router 2 are connected LAN > LAN, this will happen automatically, since, as you point out, they are all one subnet. Basically, router 1 will just be acting as a switch on the local network with respect to the DHCP server. But your DHCP server must provide the correct addresses for the gateway (192.168.1.1), and also possibly DNS. This isn't hard to do, but if you neglect this, your clients will not be able to connect to the internet.
You shouldn't have any ARP issues -- things should just work. Relayd is probably not the solution here. Proper subnet configuration (VLANs) is a better option if you're trying to setup a LAN + Guest configuration.
I would recommend putting connecting the LEDE router directly to the ISP, if possible, and removing router 1 entirely. If you need more physical ports, consider getting an ethernet switch (a smart/managed switch if you need to have more wired ports for both your main and guest networks, otherwise an unmanaged switch is sufficient if you only need more physical ports for a single network).
On the LEDE router, you can setup VLANs that have separate address spaces (say 192.168.1.0/24 and 192.168.2.0/24) with firewall isolation.
I'm going to go with this as the ISP router has 'port 1 bridge mode' which basically makes port #1 a 'half' bridge at the cost of making all other ports/wifi on the isp router unable to network with the lede router or would there be a way for both routers to work in 'half' bridge mode (e.g. samba shares)?
Apparently you still can connect to the internet in on the other phys ports with 'port 1 bridge mode' on as per other users of the same ISP router (which doesn't really make sense to me), I'll test it out tonight.
I don't see the purpose of putting the ISP router in bridge mode, except if it is necessary for some specific purpose (such as "the ISP will only connect to the router they supply" or "it is a bridge/media converter from coax/fiber/dsl"). Your network will be easier to configure and maintain if you have only one router in the system. Bridge and 'half bridge' configurations just add more complexity and more places for things to go wrong.
That said, if you need to or decide to keep the ISP router in the network as you are suggesting, it will be very important to understand exactly what it is providing on the 'port 1 bridge mode' to the downstream router, including network addresses (RFC 1918 or public/internet routable IPs), and if it is your network gateway and/or performs any DNS functions for your network. If RFC 1918 private network space, you need to accommodate this properly in the network design.
In that case, it makes sense to use it . Just make sure you know what it is doing in terms of NAT, firewall, DNS, DHCP, etc. -- this way if you run into problems between the 2 routers, it will be easier for you to troubleshoot or to ask for advice with the appropriate information/context.