So on the 1st he's caught up rent's paid in full, never a late fee, and with his next payment on  the 15th he's already in advance for the next month by 1/2He'd have a prepaid balance on account of 50% towards next month's rent.No need to rewrite lease just tell him your accountant won't let you do it any other way.

I wouldn't bother putting $1000 here and there in any special type of account.You'e going to need more than $3000 to buy with an FHA (closing costs, prepaid taxes and insurance, repairs, etc).

Since I am using my VA loan, and since the seller is covering closing costs, as is common in the area, I end up without any cash out of pocket, and also receiving deposits and prepaid rents from the seller (since the seller self-managed and did not use a property manager.) 

The cheapest way is pre-paid legal.

At 6.75 % - $7330$4,329.00 Closing costs$25.89 prepaid costs$2,975.00 discounts which I assume is another word for pointsAt 7.125 - $6281$4,329.00 Closing costs$27.33 prepaid costs$1,925.00 discounts/pointsDo these look right?

They can draft their rent from a traditional bank account or a pre-paid debit card and such.You may decide that the fee is not worth it for just a few tenants, but if you plan on growing, it's nice to have it set up and just build on it.I am too busy to process a bunch of rent checks every month.

Prepaid rent is credited to the seller.

Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.Note: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan.The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value).All other cash-out refinance eligibility requirements are met.

Also, remember, the money isn't yours if it is prepaid. 

The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV/CLTV/HCLTV ratios for the cash-out transaction based on the current appraised value).