I'm worried about theft of appliances and materials while vacant. 3) I imagine that the inspection will turn up some problems.

While I’m working on the improvements, how can I protect our investment from theft of appliances or materials?

State Farm will not do an umbrella policy because My father and I will both be on the loan/title (thinking of alternative ways to do this, advice would be great.) and they think it is too much exposure. 

The other thing I am wondering about is alternative financing.  

A purchase and sale contract usually mentions and act of god paragraph and if something has  (materially changed) with the property the buyer can cancel.

Landlord shall have a lien on any improvements, materials and personal property within the Premises to the extent permitted by law for amounts owed by Tenant following any Default.

Here is some good reading material for you regarding "disqualified parties".https://www.irs.gov/irm/part7/irm_07-027-020.htmlYou will also need to become very familiar with "prohibited transactions" as well:https://www.irs.gov/irm/part4/irm_04-072-011.html

Advised her she would have to pay for the damages..labor and materials.

I would love to learn more about the laws, What kind of materials would be the cheapest on a low budget.

Others will have a better handle on alternative neighborhoods.