Or can I just discount that amount of the loan as part of the loan expenses and call the proceeds the check I get?

Listen to my podcast - http://biggerpockets.com/show65 so you will know how I did it.To scale it - you need to buy GREAT DEALS - meaning properties you can buy at a STEEP DISCOUNT.

Normally this wouldn't bother me too much because I don't own them, but I feel as if 1) it would prevent me from getting new/better trailers in the park and 2) if I raised the lot space rent (or even if I didn't) the owners would just walk away and leave me with their pile of junk.Not sure how I should discount the above or, if it is a deal-breaker at any price.

In my experience, most buyers discount rent that is received from units that are known to be illegal.  

The advantage I see with using hard money lender step dad is being able to purchase units on a "cash discount" and refinancing when the bank will take me.

Sounds like a good plan.Now you need to open commercial accounts at HD and Lowes, join a local REIA to take advantage of their supplier discounts, talk to an insurance agent, make sure your credit bureaus are in good shape, get pre-qualified, buy a property and talk your friends and family into helping with the re-hab.Good Luck.

It's still a strong seller's market, so there's not much reason for a homeowner to sell their house at a discount. 

We are getting cashflow and a much higher ROI since we bought them as non performing notes at a deep discount.

I used to be all about how much discount I could get off market price, but I've moved towards quality.

If you bought at a discount because of poor condition, then do a rehab, you might even get all that you paid for the property with the increase in value.You'll get regular investment property interest rates which will range from 4.375% to 5.2%. it's really pretty simple.