It is certainly more challenging to investing actively when you don't live in the market but if you have an investor friendly agent that has experience and connections to contractors, property management etc then it helps reduce that risk.

Normally, it'd have to be a loan to yourself which only creates more debt reducing your financing ability. 

I think what would best suit our risk tolerance is handling a mortgage where we didn't necessarily need to rent out anything, yet have the ability to rent to reduce our cost of living.   

That will pretty significantly reduce the net taxable income amount.The net taxable income is then run through the trust tax table, which actually tops out at 37%, but on a graduated scale.Your vague "profit" number makes it impossible to provide an accurate representation in this scenario, but I suspect the net taxable amount would be considerably less than how you are evaluating this.

My investors are normally other real estate investors who want a better deal, with better treatment, cause no one should be reduced to being a faceless number unless they want to be.

This reduces direct property management stress.3.

Would I reduce the return on the $260K by the 3.8% mortgage? 

Have you tried to ask her to reduce her charge. 

My main focus is really to reduce the number of closings (due to fees) and to pay the family member back for helping cover some previous work.

To win at seller financing you overpay on the price and reduce on the terms.