You need to hire a competent LL/tenant attorney in NJ, and the sooner the better!

@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.

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

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.

California is a special case where tenants are protected much more than LL's.

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

Hard for a person to imagine living there. 

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