In other words even if an investment was a "rip off" there were usually signs that indicated such (warning flags) at the time the investment was in the offering stage.  

I don't think any insurance carriers will give you a new policy these days if there is active K&T. 

Good or if there any red flags?

Are there any unique considerations or red flags you look for compared to the traditional rental process?

And won’t parties involved see red flags waived by all this “out of space” subterfuge?  

I do the umbrella policy and will check with my carrier.   

On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.c) how open to scrutiny are they?

If you conclude the leverage is so good that everyone comes out ahead that's fine but if you are only able to originate hard money debt that may be viewed as a red flag by investors who will question your experience and borrowing strength.

One of the major driving factors for increased premiums is the carrier's requirement for higher replacement cost limits on file for buildings. 

Some carriers don't ask but you should make sure that you're not indicating (in the policy application that is typically e-signed) that you aren't using your property for student housing if you are.