The floor might also be bowed where the toilet sits from rotted out sub floor and needs to be redone and extra structuring underneath.If the light fixture has sustained water below it's best to replace it rather than something bad happening later on.

If I make an LLC or S Corp, how do I pay myself without having the income be viewed by the IRS as "Earned Income"?

What ever monies extra you give him for being a nice guy, comes out of your pocket (profit).

It is money they earned so the 1099 contractor taxes need done.

You are correct in that there will be extra closing costs, but the cash-on-cash returns with putting 30% down still looks really good.

The extra wording is not necessary where I am, where a LL just has to wait it out an get the sheriff to do the lockout.

(I spent $4,000 in repairs on my rental last year for an unexpected repair....it just happens and you need extra $ for that kind of stuff!)

Better yet, just pay a bit extra up front and get tailored, advice from a trained, insured, professional. 

It's something I wouldn't think to do unless someone actually told me I could, which you just did...I'm going to get my real estate license so that I can make offers and do some extra MLS searching myself, but I will definitely be in touch with you, you seem like you really know your stuff.

(1) Then you can ask for the PMI to be canceled when you have earned through payment or appreciation at least 20% equity