The key is to ensure the HELOC doesn’t turn into a long-term financial burden if the partnership doesn’t pan out.

Sounds like they are dumping a bad 1031 property into a REIT and spreading the financial burden upon existing REIT members. 

& how you become financially free is by letting whoever your renting to (I'm guessing that was a step also?)

So the question becomes based on their individual and personal tax situation what is the estimated tax burden they'd save? 

Typically 175% of wages which would include benefits and overhead to arrive at burdened wage.

Let's assume that the neighborhood is a C class and the median income of the city is greater than 3X of the market rent.Here are some of the considerations I've come up with so far:- Units are in need of renovation and capex is too high or not available- Unit quality is not the same as market - Seller is worried about losing tenants due to increase- Vacancy rates are high or filling units have been difficult- Rent increase would take multiple increases over multiple lease periods to get to market rate if seller is trying to retain the same tenant- Seller inherited property and just want to liquidate- Seller needs to liquidate quickly (financial burden, sickness, quick exit from land-lording)It seems like I might be missing a warning sign about a deal if they are selling with current rents that are under market; but again, this seems to be most of the properties I've underwritten.And in the same vein, what should I be worried about when purchasing a deal with under market rent with the intention of raising them after purchase. 

You could, for the purposes of verifying that you are not renting to someone who is potentially dangerous or financially incapable of shouldering the burden of being a roommate, ask them to apply through Zillow so that you can see their background check, that also gives you the opportunity to have others who might be interested in being your roommate as well, apply.

This leaves here with almost $500k in capital gains to pay tax on.I'm trying to find creative ways in which she can minimize this tax burden. 

Wealth Building: Paying off the first STR focuses on cash flow and financial security, while buying another property focuses on scaling and wealth building.

Selling and buying something else you want keep and doing a cost seg in would help with the tax burden probably better in this situation.