In my area, there seems to be a ceiling on what people will pay for rent and if they have enough income to rent a $500,000 home, they will just buy one instead.

To even find one deal you need to do marketing and build a buyers list, but what are you buying with?

I am buying an STR in Tennessee.

Meaning they buy the materials and provide the labor and then make a receipt showing the total.

One of my neighbors met with me the other day, who is retired along with her husband and they plan to sell their paid off 5Br with completed basement house valued at $750K in the same neighborhood and buy a smaller unit near Warner Robins GA.

your onsite manager is a huge component of your success. working with them so they understand the goal of the property is crucial for success. buying in the right area will boost your profits.

"Let me buy you a pack of gum.

and pay them off with that, BUT if he were to sell the property, he would rather much sell it to us (his family).so my question here is if I were to bare interest in buying his property (it would be my first) so it stays in our family line, what would be the best way to purchase and finance it (possible house-hack or LTR if I were to purchase it) ?

You can use data sites to find buyers who have purchased properties under an LLC and then skiptrace the owners, knowing they buy in the area and have similar inventory to their buy box. 

We provide housing for Homeless and Addicted people in underserved communities, and in an attempt to revitalize our Downtown area, and expand our Program (part of it is home ownership and entrepreneurship) we need to be able to buy adjudicated properties, or have them donated, then have the finances to redevelop and repair them.