Not sure how much you can claim from the seller for your other costs (title, attorney, etc) but if you are passing by other deals for this one, it might be worth cutting your losses and finding one of those other, hopefully smoother deals.

It is the best looking house and one of most expensive on the block but probably one of the smallest so if i add on with a cash out refi, over time, i will lose money on the addition and assumely be paying more in monthly payments which cuts my already low cash flow.

If the Master policy is insured correctly then this should satisfy your lender, however, if the association has chosen to cut corners and is not fullying ensuring the property/building then your lender might require you to purchase flood insurance to balance the requirements of the loan.

As you can see I started to cut out the wall but stopped and thought I might see if anyone has easier solutions.Any advice would be greatly appreciated!

It's also larger in terms of square footage some of the other houses on the market.Regarding the rehab, I feel like a cut every corner possible, haha.

That being said...Is it enough to simply transfer the funds from the security deposit account to our operating account as paid rent for the next 2 months or is it necessary that I refund the money to them with a receipt, have them sign the addendum, and pay their rent themselves as usual? 

Trying to cut costs where I can. 

The end game is what's in question here.I'm thinking we take a flat cut off our earnings, but the majority goes back into the business

Yup, that pig that was bleeding him emotionally with the 16 tenants that he have to manage (or a property manager who is taking their cut of his table scraps) is now bleeding him financially as well.What would you do if I told you that "this widget I'm selling is currently giving me $100 per month BUT, it has the POTENTIAL to give me $300 per month if I invest MORE money AND TIME into it.

When you do select a applicant, better or not, you simply tell all the rest that their application has not been selected and the unit has been filled.You do have that right to reject on a feeling, appearance, attitude etc.