Buying new home, converting current home to Investment Property. What is the best way to do this?

[Kevin Bridgeman]

I currently live in a 1100 Sq. Ft. house in a small neighborhood. I purchased the house 3 years ago for $122,000 and still owe approximately 95% of its value. One of my coworkers is retiring and moving to Florida. She wants to sell me her house for $65,000 and be done with it. The new house is larger than mine and on a bigger lot outside of the city. I would like to move there.

My current house is near a military base , and in a neighborhood commonly used as rental property for soldiers. I would like to turn my current house into an investment property.

My grandmother learned of this plan and is considering taking a lump sum from her annuity and buying my current house outright, so I can mortgage the new house.

My main questions:

1. Would in be more profitable for her to withdraw the lump sum from her annuity and pay the tax penalty than for me to take an investment property loan?
2. I live in a three member household in which I am the only earner and have an effective tax rate under 5%, she is retired and lives alone. Which one of us should purchase this house on paper?
3. If she buys the house from me would there be any need to involve a Realtor? It seems silly for an inter-family transaction.
4. Would it be better to outright purchase the $65,000 house and move there, then maintain the mortgage on my current property while renting it?

TL;DR: Is it better to take a tax penalty on an annuity distribution or pay interest on a loan?

Thanks for your time.