So I guess the best answer is depends on the particular circumstance.

They are not sueing me yet but I want to know what is my liability in this circumstance.

You can qualify for FHA as long as there are mitigating circumstances on the short sale...

I am taking it as getting to know what I believe fits me and my circumstances. 

FEDERAL TAX LAWS; (B) SUCH DISCUSSION IS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING BY THE COMPANY OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) PROSPECTIVE INVESTORS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

It just depends on your circumstances.

Make sure to have a reserve acct set up with your sister for the unforeseen, and have it owned, most likely in an LLC, so it clearly spells out your roles, and ownership %.  

While the 20-25% cap rate properties look appealing, it masks the problems associated with buying a property so cheaply (Unforeseen maintenance costs, tenant turn over, and etc).

And by CITY, I am NOT talking about small towns, I would never look at any city under 10,000 population, except for very unique circumstances..While it is getting more difficult to find deals, there are still many deals out there, and EVERY WHERE! 

@Christopher Rogers  I think it depends on your circumstances and risk tolerance.