Seller mentioned she will do a final walkthrough before settlement to clear her obligation and that tenants aren't entitled to a security deposit.

as in, if I bought it, does that wipe out all existing debt against the mortgages?  

Every homeowner understands the difference between their mortgage and the equity they have in their home but when it comes to commercial real estate transactions, the difference between equity, preferred equity, mezzanine debt and senior debt can confuse even savvy investors.

and your cash flow is $300 +/- after all expenses, escrow $ for future maintenance and capX, and debt service, then I would say that is a great deal.Do you know how much or what was done for the rehab?

I think a credit history gives a much better picture of how well someone pays their bills and their current debt obligations.One of the problems with the current credit scoring system we use in the U.S. 

Should Person 1 be compensated extra for the additional risk of taking on debt?  

To buy another rental property, though, I would need to look out of the SF Bay Area, as the market is ridiculous.I have some questions on financing a second rental property, namely, do I need to be able to qualify to carry the debt of my current house and the rental, even if the projected rent of the new purchase can more than cover the monthly mortgage payments?

So that leaves you only $1000 a month for debt service.

We pay that debt down quickly because it is readily accessible for deals that come up and we really hate personal debt. 

I would be going from no properties in my asset column to two cashflowing properties to help me build capital, and payoff bad debt.