For example, their rent is $2000, they pay me $1000, I then apply the $1000 to the renovation project, which they estimate to be around $8,000.How should I write up the lease agreement as far as collecting the rents?

I am planning to include the estimated property value and the funds that will be transferred into the business bank accounts.

Is the 5 property ceiling (estimate, of course) because of debt to income ratio?

@Charmaine Alard why don't you start with comparing the rent you charged your friend vs the rent you could have charged according to Zillow Rent Estimate or Rent-O-Meter.THEN compare that to what a PMC would cost.

Many cost segregation firms will provide free estimates of the accelerated depreciation along with pricing.

He's getting numbers like $80K for a 2Bed 2Bath single family homes, additional $20 for rehab, so total under $100K and rent estimate is around $1000.

However, you can be more comfortable with your offer if you can have your GCs do a walkthrough and provide total rehab estimate prior to making your offer.

Many investors hesitate to start their next fix-and-flip project due to barriers like limited funding, uncertainty in market conditions, lack of experience in estimating renovation costs, or fear of unexpected delays and expenses.

Much more negative when including realistic expense estimates (maintenance/cap ex, vacancy, PM, misc).  

If you have more passive losses than your gain is estimated to be, you would have net taxable loss to recognize.If you want to sell and not pay tax, I would definitely look into 1031 exchange.