How can we tell if the increase in house size done legally as there is HOA governing for this location? 

With this strategy, we knew exactly how each house was operating and we could intervene or change leadership of the house if necessary to assure operations were going as we expected. 

In Fayetteville you have relatively inexpensive houses in an area with a high rental population due to Fort Bragg.

If I sell one house per year, it will pay for itself.

Cost will likely be around $120 - $160 / sqft depending on finish out and how much one the existing house needs to change.

You maybe be able to manage a house or two from a distance but a house or two will not get you what I think you're looking for!

The house I would be renting has a current mortgage (including escrow) of $1,100 per month.

Discount Property Wholesalers, Real Property Network, and Coast 2 Coast House Buyers just to name a few.They can be a reliable source for off-market deals here in the Portland Oregon market.

Extremely old and not well taken care of housing stock. 

I would look for a SubTo or owner carry property.