And it depends on the person, but yeah, most will be over 10% these days. 

@Quiche LynnI think your confusing the term noteThe note is a promissory note - meaning the document that she signed stating she will pay this person this much money.What it sounds like is she wants to send a settlement offer to try and renegotiate the deal?

Regarding taxes, I believe LLCs are pass-through entities, and you will just claim the income on your personal tax returns.

As of right now me, my partner , and one other person is moving in but, I need to find a way to fill in the other 2 bedrooms.

No "headaches" except for risk of near total loss of principle unless I put more money in...I'll take the risk of a project that I need to complete personally in exchange for a near-perfect risk/reward profile and complete understanding of the investment.

No personal income, tax returns or DTI to worry about.

Keeping your building expenses separate from your personal finances can make it a lot easier. 

I would personally feel better if they were at 4" though, particularly if there will be small kids as renters.

Hard for a person to imagine living there. 

It sounds like you are placing into service as a rental a house that was previously a personal residence.Your basis is purchase price + improvements made to the house from purchase to the time it was converted into a rental.