I feel that if we spent some capital (about $50000) improving the property the return on this would be three- fold.  

Partnerships can become messy and having three at the table instead of two can make it even more complicated.

Here are exemptions to Due on Sale(d) Exemption of specified transfers or dispositions With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon— (1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property; (2) the creation of a purchase money security interest for household appliances; (3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; (4) the granting of a leasehold interest of three years or less not containing an option to purchase; (5) a transfer to a relative resulting from the death of a borrower; (6) a transfer where the spouse or children of the borrower become an owner of the property; (7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; (8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or (9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

All three have been very successful.   

For example you can buy a three bedroom for $80k real estate taxes $4000 and it would rent for $1600 if you did minimum or $1700-1800 if you updated.I fly in to PHilly yesterday to inspect the house I am buying today.

Now to find someplace else to spend that cash...maybe on a deep fryer or three...Some before pics posted below.Don't have a great pic of the exterior yet; this one was creatively cropped by the seller to avoid the tarp covering a large portion of the roof..Room where the majority of the smoking was done, apparently:So that's the original carpet color...

he wants to sell one now and one in three to five years when he retires.He said he is open to owner financing but he doesn't want to carry a note into retirement.What are some ways I can structure a deal to make this work. 

Have gotten three rented since then, and just got 2 more.

It's a great tool and well worth the monthly subscription fee.For contracts, use the CAR form which you can buy at a local RE Board office, even if not a member or licensed.

You can do FHA with 10% down in a three unit, but not Fannie/Freddie.