Have a local bank providing the loan, have my son moving into the lower level so I got an FHA 3.5% loan and the property is valued at 220k. 

I'm certainly banking on the idea that Redwood City still has a lot of positive change coming its way that will out -perform any potential worries about the greater bay area market.

Bay Area appreciation can crush “real estate returns” elsewhere, though you can’t bank on it.

It’s foreclosured, the bank Is asking 159,700$.

I doubt banks are going to come down on price by $30k but that's what it seems like they would have to do for a profit to be made. 

If you connect with the homeowner, does the bank have to approve any deal you make as long as the loan is paid off?

After all, if the cap rate is higher than the interest rate, then I'm making profit on the bank's money. 

This way you have immediately created separation and should something terrible occur and you be found liable / negligent, your primary residence and bank account are more so protected.If you purchase the property in your name, it’s a personal asset.

Rent collection is via my bank account.

I’ve been working as an independent contractor physician since Nov 2015 and had two years of income tax returns and had to submit recent pay stubs and bank account statements to qualify for the FHA loan.