We have been struggling with what to do next on the housing front We've gotten close to buying a place a few times but backed off (including once where we had an accepted offer but got cold feet over a sizable appraisal gap).We'd initially been exploring either a condo ($1-1.2M plus HOA fees) or a single family home in a less desirable suburb for ($1.2-1.5).

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Real estate gives me something that I can outwork and I can out earn

Regarding private money, think if it in this context: you are giving people in your network the OPPORTUNITY to earn more money by giving them the chance to invest with you.

You have earned it.

Also, if I earn $40,000k/yr as a rental income, will I get any tax benefits on those income for having a 2nd home?

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In terms of optimizing it, you have a lot of options:  If it's in a desirable area that you want to live, you can live in one of the rooms and rent out the other two to "House Hack" and live for free or close to it. 

Hampton Roads in general has a lot of inventory in not so desirable areas.

I could probably live with that, but even with his desire to help us out I can’t imagine him accepting $200k under market value for the property.