I am now under the suspicion that their friend, the one who is still living at the property, is the one who created separate accounts for all three of them and did the signing for each individual who is under this lease agreement. 

You have five separate violations that are all grounds for non-renewal, and several of them are significant enough that I would aim for eviction.

I'm also new to real estate investing and have experienced the same rollercoaster of emotions.

@Jorge Vazquez we stopped doing signs over 10 years ago.We had a separate phone number on our signs, so were able to track traffic & applications from them.We were getting more & BETTER leads from our online ads then the signs - so an easy choice to stop using them (also time & money savings).

My answer would certainly be highly dependent on his own emotional make up, his desire to relax and travel, his willingness to delegate and outsource, etc.

For most investors, to provide true separation would be cost prohibitive (between $10k-$15k). 

Perhaps we "buy" the house from them for the $328K balance to satisfy the lender and don't need a large down payment and then have a separate contract with them to pay $x per month until we've paid the full $172K amount.

this is unacceptable for someone like me who manages and is a member of multiple separate LLCs, partnerships, portfolios.  

In Japan, it's the opposite, at least for structures (land and building values are separate). 

I like umbrella because there is no worry of being pierced for inadequate separation of finances, if sued you have a heavy weight in your corner who has all the consequences of a defeat, and because usually it is reasonably priced (mine today is not so reasonably priced but I believe it is mostly related to the risks of CA).I do understand that the probability of needing the umbrella policy is low.