You always want to make sure your annual ROI is well above the rate that you are borrowing. 

She is a first time borrower.

If you can't qualify for conventional due to credit now, you'll want to either figure out a lender (likely local) that is fine with your credit, bringing on a co-borrower, or considering long-term hard money options.

The borrower is in default and I need someone to help with the legal aspects of getting my money back.

Do investors commonly make capital improvements to boost the amount they are eligible to borrow against?

The FHA is one of the most difficult entities to deal with, especially if you are not the primary borrower. 

Folks who can't meet DTI, debt to income, requirements of FANNIE/bank borrowing have a whole world of portfolio (now being called DSCR lenders) at their disposal. 

Since I don't have the cash and neither does she, if we can find the right property that meets all requirements for a good BRRRR deal, I'd like to have her use the FHA 203k loan with me as a co-borrower.

You may have to borrow from 401k if you can or retirement funds for financing. 

Yes, Fannie Mae changed their rules on 6/1/2016 to now allow a borrower to transfer title to an LLC that the borrowers on the loan are the majority members of, without it triggering a due on sale clause.