I understand capital gains can be avoided by living in a home 2 of the last 5 years, but I don't know how that works when selling two homes.

If the house did contain a drug-related fire would it be doomed permanently because I assumed that investors completely avoided houses that did have drugs in them.

Any confrontation should be avoided as it will likely harm your case, not hers. 

The biggest mistake I see new out of state investors make is buying in bad neighborhoods because they don't know the area but that can be avoided with due diligence.

Additionally, we were also interested in seeing if she could do a 1031 exchange for her investment property in order to avoid a capital gains hit, which would be quite significant given the cost basis in the home.Does this sound like a good strategy, or is there a better way we can go about this?

Try to have them invest part of the down payment, to take some ownership interest and be responsible in avoiding any potential dangers.3, If you do want hotel business, then, try to get some with above 100 units, with an above mid-level franchise flag - like Hampton, Holiday Inn, Best Western or other similar ones.

Hard money is usually the most expensive option, but it fills a void when other types of financing are unavailable. 

But people flock to places they consider hot and overpay greatly and are too far away to avoid PMs.

Net gain.All the stuff you read/hear about avoiding credit pulls, avoiding new accounts, etc, is 100% true.... for credit cards.

It will need to be our primary residence for several years to avoid capital gains tax.2.