Can he really take me to court when we do not have any contract in place?   

Look into how your county handles properties of deceased residents who pass without a will or trust.  

You can also check out groups like the National Alliance for Recovery Residences (NARR), which might have some leads for you.Another option is to talk to property managers who specialize in group homes or sober living.

The residents are severly underpaid.

Yes, its mainly ordinary income from interest payments.

This worries me a little.

Be sure to do a thorough credit and background check, as well as a residence and employment verification. 

I agree that Class C is definitely not the way to go unless you are just going to flip the properties to home buyers looking for a primary residence.

Investment Info:Single-family residence fix & flip investment.

Just DM me if you want any additional data.