As for the decision, it's really tough for any of us to say without knowing your goals, your situation and the numbers on this particular house.

Does that operational aspect have to devour all cash-flow, no not necessarily but it could, all depending on situation specifics right. 

Nothing illegal about doing that, but if caught, the lender may call the loan due and if you don't correct the situation or pay the loan off, they willstart mortgage foreclosure.3) You could also go the HELOC route to tap the equity in the home, but the 12-month owner-occupancy will also apply AND the interest rate on the HELOC will fluctuate with the Fed Fund Rate.4) You could do a cashout refi as an investment property, but that will be at an interest rate 0.5-1% higher than owner-occupied rate.Suggest you meet with 2-3 lenders to explore your options about the above.Once you have access to funds, recommend you buy a 2-4 unit with 20-25% down. - You can buy owner-occupied, live in one unit, and fix up and rent the other unit(s).- If you're handy, recommend buying a property in the worst condition you can tolerate.

Quote from @Garry Lawrence: I need advice on a serious situation involving a property I’m about to buy.

Its a very poor situation for the original owner to be on the mortgage for years and years without the benefits of ownership and the control.  

Quote from @Jason Hatfield: @Jaycee Greene  they require a non refundable deposit and give 48hrs to see proof of funds I would suggest developing a relationship with an HML/PML that would give you a "guidance line" that would basically be a "pre-approval" for situations like this to present to the buyer/auction company.

Then rent the bigger home out using a property manager, allowing her to possibly cash flow and maintain that asset and let it continue to grow in value.Encourage her to consult with a CPA or tax attorney to explore the best strategy tailored to her situation.

@Jason Velie will know exactly what to do in this situation.

Based on your situation, you will likely need to recapture the depreciation when you convert the property from a rental (STR) to your primary residence in 2025. 

Most do a LLC but again it can be very different - for example I have a C corporation, had a S corp, had a LLC etc. and each one for very unique and different situations.