This can be very expensive and is usually the worst choice because you can't justify the cost.2.

Set this up by doing the math and getting the right loan so that your place nearly breaks even after a capital expenditure account is paid (for those big ticket items). 

And honestly, the approach I take towards living, if your mortgage is paid off, you are pretty close to being wealthy in my mind, since it is by the largest expense most people have.  

The risk you run with this model though is you would risk being over leveraged since your using 100% debt, and you would need the property to have a high cashflow amount each month to cover Capex, insurance, debt service, and your normal expenses associated with the property (property management included).

I am aware of a large claim several years ago in Wears Valley where the insurance through VRBO actually paid the claim.

These older rowhomes always have some issue that will equate to unexpected expenses. 

But she wanted to know if she can deduct the principal amount that she paid to the person off of her taxes since she has to report the interest as income. 

I just want to make sure I understand correctly, so even though she will be receiving a lump sum in 3 years from the balloon payment (it is an investment property she's selling me, not primary residence), she can't 1031 that because technically when she sold it to me today she became the bank and no longer owns the property, so basically the lump sum paid to her at the end, is the same as a bank making money and therefore taxed as income tax?

I paid for a cost seg study on my only str property.

Charge what it costs, but I agree try to find something that is less expensive (eg $50).