Deegan and @Arda Bircan There are technically 7 Tests for Material Participation (but 3 that are most common) -> the individual 500 hour mark, that the activity of the individual is substantially all, and that the individual participates more than 100 hours + no-one else spends more time than them.Litmus Test: Are your hours integral to the operationsThe hours that qualify must be substantially all hours and have a legitimate impact on the rental activities.Activities that generally count: showing the property for rent, taking tenant applications & screening tenants, preparing & negotiating leases, cleaning & preparing the units for rent, repairs, and improvements, managing the construction, purchasing supplies & materials, inspecting the property, responding to tenant complaints & inquiries, collecting & depositing rents, evicting tenants, writing & placing advertisements, and working on your websiteActivities that don't count: education & research, investor-type activities, and travel time..

Any idiot can pass the test , And a lot do . 

I would recommend testing multiple different scenarios though.

This allows you to test the waters without committing entirely to unfamiliar territory.Local Expertise: Leveraging the knowledge of local experts is invaluable.

Quote from @Zachary Luchs: I am merely just testing the waters to see where everyone is investing.

If you can do conventional you do not have this test (but talk to a lender to be sure and get your specific situation). 

.- Married couples filing jointly can exclude up to $500,000 of capital gains.Conditions for Exclusion:- Ownership and Use Test: You must have owned the property and lived in it as your primary residence for at least two out of the last five years before the sale.- Frequency: You cannot have excluded the gain from the sale of another home in the two years before the sale of this property.For a duplex where you occupy one unit and rent out the other, the rules are slightly different:- Owner-Occupied Unit: The portion of the property you lived in qualifies for the exclusion, provided you meet the ownership and use test.- Rental Unit: The portion of the property that was rented out does not qualify for the full exclusion but can benefit from partial exclusion based on the proportion of time you lived in the property.

You'll want to test the paint surfaces for lead.  

As for your partner, they need to also have passed the "use test" of 24 months out of 5 years above.

Get the plaster tested for asbestos.If renovations significantly reduce your profit margin, wholesaling the property to a more experienced investor might be more viable.