If your goal is passive income, it's not going to be in New Jersey when you factor in cost to purchase, management costs, and rent to price ratio, but what you can get is steady appreciation.

Setting rent significantly above FMV could be seen as an attempt to shift income or inflate deductions, leading to potential penalties.

Though it may cash flow well based on their current debt service, when you compare the income it produces to the equity they have is it actually even a good investment for them from an ROI perspective or would they be better off liquidating and redeploying?

If you are purchasing a primary home, income could be a challenge if you work at an office.

It does not include the rent income, just the appreciation, it is about 11%. 

@Charles Perkins is absolutely correct about "collecting all receipts, properly tracking all income and expenses and your basis for all assets properly documented and recorded."

But with that one lender I found I am not lendable due to not having proof of income for the last two years.

There will likely be a partnership return required where you flipped a house with a partner and lost $120,000.If you sold the other property within the same partnership, it will also be reported on that partnership return.The net result to you is that you will receive a K-1 showing your income / loss which you then use to report on your individual return.If you made no money within the same year, you likely pay no additional taxes / get no additional refund.Best of luck.

Would it be smart to tack on another 203k in the future assuming my income covers payments?

Also, focus on 2 years of job/income stability.Class D Properties:Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciationVacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions.