I can't confirm how much taxes you will owe (not a CPA, you should confirm this with a CPA) but you will be able to deduct prorated portion of all expenses on the property (mortgage interest, property taxes, insurance, property management fees, repairs, etc.) and then whatever is left will be taxed. 

Expenses (Monthly)Water/Sewer: $1,854Electric (tenant pays their own): $314Gas: $1,368Trash: $244Insurance: $928Prop Taxes: $3172Routine maintenance: $315Lawn/Snow: $1050Repairs/Replacements: $3340Management Fees: $2165Professional/Misc.

I know you should get 1% for every 100K your house is worth but since I have a low rate and dont have to pay any other fees maybe its worth it to hang onto it? 

Due diligence costs alone and fees could run over 100k or more even before closing on the property to start developing it.

I pre-quality the people who want to sell their notes and then I REFER them to my own network of note investors who accept referrals and who pay out referral fees.

Of the top of my head there will be charges by the title company, an appraisal, lender fees...anything else?

Hey, David, you could check the local newspaper for upcoming foreclosures, check the courthouse in the counties you are looking to purchase in, biggerpockets offers a foreclosure alert through their paid subscription, auctions.com, hubzu.com.

It is not a fixed lease in that he pays whether it is rented or not, but that he takes 10% of the rent and future increases (n lease up fees). 

Yes, you have to work around tenants need, and I understand them wanting a legit offer with proof of funds before disrupting tenants, but make sure you have a cancel fee in your offer, and refuse to go through if you can’t see it. 

Because you'll be neighbors, be clear about the late fee and eviction policy right from the beginning.