Your Contractor should carry both General Liability Insurance to protect your property against damages, and Worker's Compensation insurance to protect you in the event that a worker is badly injured on your jobsite.Before you start construction ask your Contractor to provide a valid, up-to-date Certificate of Insurance that indicates the coverage that they are carrying for their business.

A letter must be sent to the tenant stating the Owner's intent to nullify the agreement due to the tenant's breach of contract (not making payments on time)...and hope that the tenants don't have access to even a bad lawyer who would argue "owners said it was OK...

I think this might be a better choice that doing metal bars on the windows for the most basic reason it looks better.

He explained that their bank client doesn't want it due to fair housing.I'm assuming it's part of fair housing where you can't call out a neighborhood as being "nice" or "bad" or "crappy" or "full of crime."

It's not an excuse to do a bad deal and with no money down, it may not cash flow, but you'll learn a ton and have your housing paid for by your residents while you're going to school. 

Not saying you can't do it, but the investors that get the deals in this area are experienced and have a ton of cash to deal w/ the rehab, or overbid and make bad deals. 

Is it bad on crime?

( bad sign ) So I did a walk through and the place is pretty bad!

It sounds like an easy choice - if you don't like the numbers, the realtor and the basement flooding is simply icing on the cake I'd find another realtor who has good reviews/was recommended to you and explain the situation to him/her. 

I'd say that your chances of getting a bad tenant are greater than in say PVB, but you'll get a bad tenant in ANY neighborhood (A+ down to D-).