And I do get the point about multifamily providing more insulation on the payment if something goes wrong, but at the 2-4 unit level I think this is somewhat mitigated.

If it doesn't have the 100% history and you're concerned about future vacancy then maybe switch it up to mitigate your risk.Any chance you can squeeze a kitchenette on the second floor?

First off @Kash Johnson I am sorry to hear about your father in laws health and have been through this myself.This is definatly a question for a tax attorney / business attorney / CPA / Financial advisor / Etc.Specifically you want to also consult with an "elder law attorney" who can advise you on the impact of asset protection and taxes when it comes to stuff like this.The challenge always is finding a financial professional that understands the full spectrum of tax and asset protection and not just specialized in one area of it.We use a very advanced trust called an "Irrivocable, Non-Grantor, Complex, Discretionary, Spendthrift Trust" and it has both the asset protection and the tax mitigation.

Just make sure they can get into the crawl space.Structural issues could well be possible to mitigate and might not be so bad once you have a GC onboard for the bigger project.

Since everything else look decent I would rent to them with an added Risk Mitigation fee.

It's not about if you will get water, it's about how the water is mitigated. 

Finally, you can't mitigate the risk of a bad economy.

The reality was that we divided the money evenly and was hoping we can apply the 250k exclusion each to mitigate taxes.

However, the way I'm thinking about it is that if they fail to pay the mortgage, I'll get the house back so in my mind that mitigates the risk.

Or, are you putting 35% down to mitigate risk?