What is she doing now in terms of paying for housing? 

Expect to pay 4.5% once you account for village, town, school and county taxes. 

For example, I mention that every adult must pay a $30 application fee, pass my credit/criminal background, make a combined income of 3x the rent, and whether or not the property accepts pets.

You pay 10% penalty plus taxes (lets say state and federal of 25%) - so you are paying $70k in taxes so your $200k is now $130k.

My net number is rental income minus expenses(3 mortgages, paying power bill at all three houses, property tax, insurance, internet in two properties).

Next up I'll be exploring what would the seller pay for peace of mind?

Reporting the proceeds you pay to seller on a 1099 sounds reasonable.

I am in 2 of his deals and both are not currently paying a return. 

It will pay off. 

You also need to consider that at a lower percentage of money down you will be paying a Mortgage Insurance Premium or MIP.