Your prospective tenant may prefer a play room vs a BR in the basement so it is a little tricky. 

You'll regret it.A tenant must be a law abiding citizen (no criminal background), willing (credit verification) and able (job income verification only w/ no commission or tip payments included) to pay rent and take care of a home (landlord references)   If they pass all these, then whether they are "nice" or not comes into play.  

I dont suspect any intentional foul play here, apparently he is a doctor and most likely is in control of the corporation but I need to make sure they arent trying to execute a prohibited transaction.  

Not sure about Subs, but the whole Contr playing field sounds a lot weaker there....just a hunch2) This could just be the people you are attracting or getting unlucky with....just a run of bad luck.

Who is the authority that inspects to determine if the house meets rental regulations for safety? 

I am playing devil's advocate and think this coverage denial can easily be fought in court. 

You'll have to deal with the FIRPTA tax withholding, but that would only come into play when you sell the property. 

Is this where a 1031 comes into play?

Doubling or tripling of property taxes by the taxing authorities, new permit requirements and fees, insurance, increasing VRBO and Airbnb fees, etc.

I am going to try to have the current tenant this is occurring to take me to their bank so I can get the bank statements directly and be sure I am not being played again.