Begin by assessing the area's overall appeal, including factors like crime rates, school quality, and amenities.

I would assume the tenant will have to be evicted(worst case) and factor that into my initial offer. 

As for whether one has to get quid pro quo in increased rent for improvements, there is also a factor of the quality and longevity of the tenants one gets with an upgraded apartment even when rents are limited by neighborhood competitive pressures. 

Many options only require a soft credit pull, and depending on factors like location, experience, and credit score, lenders can offer leverage of 85-90% of the purchase price plus 100% of the rehab funds.

Be sure to factor in the effect of Unrelated Business Taxable Income (UBTI) if you borrow money (non-recourse loans only) to purchase the property by the self-directed IRA. 

You're stacking risk factors - first deal, partnership, no existing revenue source, and making an off market purchase for the first time.

Consider factors like job growth, population growth, and rental demand.

Budget returns and repair costs depend on several factors (all of which change over time). 

Tons of factors!

Its certainly possible to get into the upper/mid sixes depending on the qualifying factors but can also say that the rate benefit to ARMs right now are very paltry - probably 1/8 or 12.5 bps (only 0.125% lower) at best