My goal is to create passive income through investing specifically Buy and Holds.

How is their work, income and credit history?

Long-term I'm hoping to build a portfolio of cash-flowing properties that produce enough income to live off of! 

Ok at a reiclub meeting I spoke with someone and he brought up the idea of Control without ownership while going to landlords offering them 5 year NO vacancy lease. Then he said to go ahead and RE rent it to other ten...

There probably aren't that many investor buyers in Spearville and the installment sale would spread the income tax burden for the seller.

However, I've seen the full income statement from the last 2 years, and the previous owner hasn't been making nearly as much as I would expect, mainly due to high costs.First question: should I be worried that this is a lemon... or is it an opportunity?

That will tell the story.If it is a high score then that combined with a positive check on job, income, previous landlord etc. should be fine.

Future plans are passive income with rental properties and starting a property management company for our properties and others. 

My goal is to gain another form of income, both short and long term. 

They generated pretty decent rental income.