If a bank would allow a transfer to a LLC in the future that would be great however from what I have read that is unlikely.

You start with a bad baseline, which creates a lot of upwards potential and a ton of work to do, which allows you to follow your own vision and do it right!

I have to do the due diligence with the city to make sure the allowances for water, sewer, electric infrastructure can be accommodated.

. - 2 + 1 would only be 7 people allowed in that house.

Always remember to do the math analysis on the prospective property and try to look at the subject property before you make an offer or at least have a clause that allows you the time (about 15 days) to make a detailed inspection and possibly back out of the deal without a penalty that hurts you.Right after you close get an insurance policy that will protect you if there is a loss.  

The situation with this Seller could be allow you to eliminate the existing owner's monthly payments, create a home ownership opportunity for someone that didn't exist before and help you make some money all at the same time. 

Have a company in central PA, that handles my student rentals, PM me if you are interested, they do not allow you to post the information on the Forum.

IMO, ownership of any entity is ownership of the assets of that entity, I'd want to see that under FHA guidelines before assuming that they would allow someone to control ownership of a residence and claim they could not have used that residence.

You also might find that they don't allow for properties to be rented at all.

By doing something like this it allows them to focus more on things the crowd may not like as much but that could be a better play long-term.