If you buy a HUD home, are there any legal stipulations that would prevent you from turning it into a rental, or anything else that would hinder an investor?

Haven't "had" to do it, but it anything that attracts a renter is a good thing.Installing the blinds helps to prevent the tenant from having to hammer in little nails and hanging sheets over the windows, which I guess is okay but looks totally ghetto.

What would you do if you were to explore this option and how would you prevent yourself from being burned?

He has written rules into our by laws preventing moving kitchen and bathroom plumbing.

So addressing it up front prevents that from being you.

That would prevent an exchange into REITs.However, it's possible to exchange into Umbrella Partnership Real Estate Investment Trusts upREITs.

Is there a way to prevent this if so? 

Just make sure you have a solid buyer and enough time to prevent the house going into auction. 

I hear so many different things from people online it just keeps me confused and prevents me from taking the "next step".

Whereas with a car- you could sell the car and STILL have debt.You could always do a mix of both- pay a HUGE down payment to have a bigger buffer between the home value and the mortgage + have a lower monthly payment.Regardless- even though it may be preventing you from buying RE at THIS MOMENT- you are doing a great job financially being completely out of consumer debt!