Sounds like a rhetorical question, but your interpretation is correct. It basically means something you cannot possibly imagine; something quite baffling.

Yes, it means that it is beyond your understanding, that is, you don't understand how it is possible. It is correct, but it is an expression used in the spoken language, not for formal writing. However, I think it should not be as a question, but rather as a statement. The person saying it is not asking how they can live together, but rather stating that it is beyond his understanding how they manage to live together.

Yes, you can say that - and it means what you said it means.