If you had concerns about the asset if and when you pass away and would like to avoid probate, a Revocable Living Trust that owns the LLC that acts as a Holding Company is a good option.

When you're listing has no reviews, at lot of people pass over it, no one wants to take the chance. 

The court ordered the tenant to pay back-owed rent plus interest. 2 years passed, and the tenant reached back asking to "clear up the balance."

I would then pass that on to you in a rent increase of $100/month more/less.

Is it realistic to pass material participation test if the property located far from primary residence, like vacation rental?

It's also important to remember that low maintenance costs don't last forever, and that will an increase expense item as time passes. 

Why even entertain lending to them?

CA OR WA have all passed new legilation to allow much smaller lots and developments .

This can bring you steady income with less frequent turnover and lower maintenance than STRs.Executive Housing/Corporate Rentals: Atlanta’s entertainment and business sectors drive high demand for corporate housing.

If you can't lease it as an entire unit and make the numbers work then I would pass on the deal.