Sounds like he will be the "GP" and you as parents will be the "LP".

You are deciding between buying a multifamily or a large home and renting rooms and asked the pros and cons of buying a large home and renting rooms.The first thing you want to consider is zoning and how the local government regulates rentals.Some communities limit the number of unrelated people who can rent in a property.Once you confirm how many people can rent in a property you want to have a local title company look at the deed and covenants that may limit the number of unrelated people who can live in a property as well.The pros are a property may check out that you can rent to a reasonable number of people in the property and the cost of the big house may be less than a multifamily offering a greater ROI and you are using the property for its highest and best use adding value to the community with affordable housing.To Your Success!

.$2k per unit with 4 units ($8k total rent/month) that only needs $60k in rehab should be selling for a LOT more than $275k.

So losses from that specific rental may be utilized.  

Might be better to save money for that property rather than put it all into one egg.

Unless they wanted to say that the units in those areas could not be rented at all, then to me its absolute nonsense. 

If you get a good deal on the price, my suggestion would be the second route to finish the renovation and try to sell.

Just a heads up this will not be tax free, it will be a pro-rated exclusion.

Also, I don't know anything about the property but if it's under rented it may not be in market rent condition.

Quote from @Tanner Pile:  @Eli EdwardsJust like Tanner said, a quitclaim/promissory note must be added to the property.