May or may not be substantial, which is another conversation.

His loan terms allow him to drop it off if he has done "substantial improvements" and if his new valuation puts him at 80% LTV or lower.Thanks to all for the tips.

Not nessacarily more, but better in the sense that if I saw 10-15 of those types of properties then I think we'd find a winner.On the other side (higher end, equity market) I have seen a few data points of price drops in a suburb of Des Moines that have been pretty substantial. 

I think the above would still be your best bet minus the house hacking - IE: find a place that is best set up to produce income, but also has substantial opportunity for improvement.Just my 2 cents.

Then we would take the cash in hand and purchase a primary residence to live in (say ~$50K down payment) and then put a substantial down payment on another buy/hold property to rent out.

You will pay ordinary income which will add substantially to your tax bill. 

Also, bank on those taxes, sewer bill, and water bill going up substantially every year in the city; City Hall sees landlords as little ATMs for them to pillage.

Process looks good with the lender, however they are asking us this:o Did you make substantial improvements to the property and if so what were the improvements and do you have a builder contract or invoices to document cost?

Unless you'll have substantial equity.

@Bhuja Parikh Unless you work with a wholesaler to find you a property in some sort of a distress and be able to acquire it at a substantial discount, you'll have a hard time finding anything close to a decent property (maybe in a C or D area?)