Or, he could put the amount above his basis on an installment sale essentially owner financing a portion to you, which would give him capital gains taxation instead of ordinary income tax.  

@Patrick J LearyThe condo will convert from a personal residence to an investment property.You are eligible to offset rental income with ordinary and necessary expenses such as real estate taxes, home owners insurance, mortgage interest, HOA fees, depreciation, etc.To calculate depreciation, the depreciable basis will be the lower of cost or FMV at time of placing it in service.Make sure to include improvements when factoring in cost basis.Another question to ask is should you sell now or in the near future.

Also... can I invest the business income into funds that give a dividend (like ahpfund), or will the earnings be taxed as ordinary?

When I bought a duplex in Lakewood, Ohio, the POS inspection sited the steps to the patio as they were not completely level.

There is a tax play that can be done to convert what would otherwise be ordinary income into capital gain income.

Also, I would be sure to build in certain protections - such as a sale "in the ordinary course" or "in a customary, orderly manner" or some such. 

I am slightly under $10/sf for those, but if you add sheets, towels, decorations, cooking utensils, patio furniture, BBQ, security etc I am probably  at another $4K for a 1100 SF 2/1.

I also email every tenant my move-out instructions and cleaning tips, as well as an explanation of what is / is not "ordinary wear-and-tear".

The expense needs to be ordinary and necessary to be deductible.A $500 training may be necessary and ordinary.

this simply means you are in the business of buying and selling real estate and your income from such is ordinary income and depending on how you have it set up.. your subject to self employment tax as well.. you are no longer a passive investor.. the  threshold I have always heard over the years is 7 or more in a calender year.