If you want to protect your friend's capital as if it were your own, you'd want to:1) Secure the loan with real estate in the form of a deed of trust or mortgage (depending on the state the property is in)2) Obtain property insurance binder with your lender as an additional insured3) Obtain a lender's title insurance policy protecting them (different than an owner's policy) and transfer all funds through an escrow closer or real estate attorney (depending on the state, the requirements for closing may differ)4) Use a real estate attorney who also practices private lender law in the state the property is located in.

We are currently working on how we are going to budget for these additional replacements.

My recommendation is to hang out with Alchemy of Money for a CPA and Engineered Tax Services for additional tax strategy. 

I have a very investor-friendly contractor (who offers pay-at-close in addition to conventional), and good clients who would be open to unconventional sales.

@Vikranth Biradar Here's an article with additional FAQs on cost segregation studies that you may find helpful.

In the meantime you'll be acquiring a hard asset for a fraction of the cost that's giving you returns. 

If you have any additional questions or concerns, please don't hesitate to reach out to us."

The owner has done some questionable work with the kicker being an un-permitted unfinished addition that would either add 150 sqft or cost to remove/rebuild, still not sure how I want to approach this. 

In addition to what Michael said-if you do go ahead with purchasing it, write in the offer that they can not rent out the vacant half, deposit from the occupied side is transferred to you at closing along with prorated rent and get a copy of the lease that has been verified.

The professionals listed have additional training and ethic standards that set them a part, however it is important to conduct your own research and properly vet a few property managements before making your decision.