There was a small fire in the downstairs den area so I'm thinking that it might have been a drug lab related fire because it is selling for so cheap.

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Although prices are high enough to limit returns, buying property here is still relatively cheap.

When they look at your credit, they look at home much debt you have relative to your income. 

Would this arrangement run afoul of related party restrictions?

@Benjamin RichardsAs was said by others,  interest on money borrowed for an investment deal is deductible.Also, money borrowed from a relative is not "hard money", it is private money.

Any visits- inspections or incidental fees (not talking about fire/ weather related)5.

As you mentioned only half of the cash out is used to construct the new addition,  only interest related to the debt that was actually used, half in this case,  to fund the new remodel is tax deductible. 

What are you losing money to thats not related to any of these?

BUT if you must do it, then, just get one of the families of your trustworthy friends, or, relatives and have them move out there, after receiving some intensive training in hospitality, to manage the small 60 units for you and take a risk!