I thought rates on 30 year fixed right now were around 4.0%...With 20% down $108,000 down payment; add in closing costs $3965 (Two Family) and prepaids $5268; total funds needed is$117,223 (includes first year ins premium).

The guidelines applied to cash out within 6 month of purchase:-The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value)

I am paying about $3k per property in fees and closing costs (not prepaids).

Does that include lender fees, any prepaid interest, prorations, insurance? 

I have two accounts: one for liabilities (security deposits, prepaid rent, etc) and one operating account.

There could be a ton of profit or wiggle room on 95k pre paid rehab budget for the seller if everything goes according to plan and that rehab might cost 30k to 50k.

You will have to refund I believe the pre-paid rent not used (whether that could be used for damages beyond sec dep...that's another state law question). 

What do I do with the prepaid rent?

Lenders will usually want around 6 months of taxes in escrow. 12 months in home insurance, either prepaid or in escrow.So it's safe to assume 4%-5% in closing costs, to include lawyer, lender fees, survey, lender tittle insurance, appraisal, inspection, escrow prepaids, etc.

@Renee R. for this type of situation see if the tenant will get a pre-paid card, such as the NetSpend card, as they can use some of those cards like a bank account for electronic payments.