And "that" conversation isn't necessarily a bad one to have, depending on your tolerance for risk.VA has the lowest credit/income/asset standards paired with the best rates & no mortgage insurance, they compensate for this with the highest standards for the property of any traditional mortgage loan program.Depending on your risk tolerance, you may want to actually be willing to spend money putting BS band aids on the home post-appraisal and after you've got your conditional loan approval.

Please keep in mind that I have no experience in your market, I have no idea what local housing/rentals/environmental conditions are like.

You could go several months with no costs whatsoever, and then get hit a $3000 air conditioning bill.My question regards how people handle this with capital.  

Great condition, newly renovated, it's the right type of property at a discount.

Must it be in perfect livable condition ?

@Seth DomotoI think your repair/capex budget is far too low, you're probably looking closer to 15%, but that varies by market and condition of the property.

I know i should be able to get a 2nd FHA loan under this condition but what happens to the 1st home (any penalties?) 

If you have financing, you should review the promissory note and loan conditions to ensure everything is correct and acceptable.

I was thinking maybe I could do a subject to and then live in the property and slowly fix it up until it is in a good condition rent out. 

From the leases and addenda, move-in condition forms & walk-throughs to letters authorizing cable/satellite/internet installs, and new PO Boxes new tenants are time consuming.