The only purpose of the account would be to collect payments and pay bills like taxes and insurance on assets held by the LLC.

You pay 10% penalty plus taxes (lets say state and federal of 25%) - so you are paying $70k in taxes so your $200k is now $130k.

I like the fact that one and a half units pays all bills.

Now, this would obviously be negatively cash flowing since you would need to pay taxes and insurance.

The property owner's tax professional can help them with that and ensure they don't pay taxes twice on the same income.Disclaimer: My advice/opinion in this post is just that, my opinion.

Property damage, excessive wear and tear, but paying, that PM has an incentive to look the other way, don't they. 

Not to mention, the right system will enable your tenants to pay rent online, have a tenant portal, and all the other features that both tenants and owners need this day and age. 

Who pays when the resident breaks the agreement and quits paying? 

If it is not adding up, and you can find an attorney specializing in that type of thing, it may be worth paying for a little of their time.

Going to guess the $797 is rent only, with tenant paying utilities.