Had to paint her room because of a black film on the walls and ceiling.

Gives you room to grow, and increase rents.

The more I think about saving a grand or more a month, the more the idea looks appealing to me.

We are toying with the idea of asking for a couple grand off the purchase amount to help mediate the water problems.Would love to hear from the wiser and more experienced. 

And this substantial discount can give you room to do a quick light refresh (fixtures/finishes) and come out ahead.

@Ryan McGrath I think your first concern is to make sure it's a legal rooming house or to understand the steps that it will take to make it one - which I'll bet would include things like extra egresses and a sprinkler system.One incident / phone call / police visit where word gets back to the building inspector and you might find a big red "VIOLATION" sticker on your front door.Next, I'd want to do some forensic accounting. 

There is no place for a third room short of closing off the living room, or dining room. 

As a matter of fact, one of the parents asked me if the room is occupied by a female student or not.

Both of these solutions would still have a solid-sized living room.

(She can live there, and we can rent out the other two rooms)-Is there a way to put the property under my name/share the title with my mom instead of "buying" it?