There will be lots of other kinds of documents needed included available tax returns, rent rolls, current P&L, 3 years projections and business plan with assumptions on why the projected rents are viable etc.

Agree with @Theresa Harris - start the regular process anyhow, so you have the leverage of a potential eviction on their record; but certainly let them know as well that the security deposit is not the last month's rent (some people just don't know any better and make that assumption).

I plan to split it into two because my assumption is that a small private bathroom is better than a large shared as a renter.

Suvas,I am basing this on the assumption that by townhome you are talking about a free standing home in a homeowners association. 

Your assumptions of prices/demand are steering your decision.

Yes, any analysis of this deal should start with the assumption you will never, ever see that balloon payment.

Use these comps to estimate Gross Potential income (GPI), and apply standard vacancy assumptions and a 30% expense ratio, this will give you a good idea of the NOI for financing purposes.

I would recommend having a conversation with a lender before making that assumption. 

*Not a CPA*Assumption: The property's fair market value ("FMV") was not below $130,000 at time of gifting.

Your rents look high to me for one bedroom and shared ‘everything else’… but I’m not into boarding houses, so I may be out of touch there.Maybe some bad assumptions?