There were a small amount of negotiations around securing tenants in the downstairs apartment at the price they identified and cleaning up some odds and ends (asbestos abatement, fire safety items, etc.)

They are moving out at the end of the month and I'm already using their security deposit to make up for unpaid rent.

They use the property to secure the loan and when they give you all the money upfront (but the value of the property is the same when purchased) there is a lot of unnecessary exposure to risk.

Baby Boomers are a massive generation and Social Security helps pay rent for a lot of them, in some ways it's a version of Section 8 housing but obviously with different tenants. 

If not, make sure you get copies of the rental agreements from the landlord and the security deposits. 

This is one way to secure the price and funding for the project by the owner. 

Where Do you end up putting the security deposit?

It sounds like your primary goal is financial security during this transitional period.

From your story I gather:first, you secured financing through an FHA loan with a 203K included (where you planning on living there for one year to meet the fha requirements?

Our first property was under-rented by $200/mo, with no written lease agreements, no security deposits and no pet fees.