I've often heard that prepaying of rent like that is a red flag as well but never fully understood why?

I've never really understood the fixation people have on completely smooth walls anyway.

Also, as I understood it the state agency that oversees these types of businesses can come in and make sure regs are being adhered to.

OK, understood.  

 Steven J.Ok, understood, and thank you. 

Since my business plan is to just stay as a landlord as a beginner from what I understood is not the right time to get a RE license, but for future if I do become successful and decide to keep on buying properties it would be the smart way to do it.  

Understood. 

Understood.

They also understood the security deposit was non-refundable.The arrangement worked great!  

No, I believe I understood your point.If it's legal to circumvent a government policy that requires private owners of rental properties to have to participate in a government program that will require them to eat the cost of more management and accounting and inspections and headaches and that requires them to have to follow rules and regulations only required by a government entity, in which these private property owners have no representation (because these HUD rules cannot be voted on by these same property owners) - then I have absolutely no problem with legally circumventing this situation at all.To say it's just a matter of source of income is really .....unreasonable at best.