If breaking the lease would pose any big issues for me.

I have the same issue.

The two main issue with the property are large cracks in the brick basement walls and foundation issues both from settling.

You'd essentially be losing 2% on the spread, not to mention that technically your amortization includes some principle, which means that your second month, you will earn slightly less, and the 3rd month slightly less, etc., causing your negative spread to be even greater.On the other hand, you could try to pick funds or stocks that yield higher and capture the spread.  

Rich, it was full but the city inspector had a small issue with the sewage and the the tenants had to leave within 60 days since the owner did not want to fix it. 

Appraisal came back "as is" and issue free, documenting the room as "[the room] was once a bath room.

. $804.03 PITI $41.67 Sewer bill $146.50 Property Management (self) $146.50 Cap Ex $73.25 Vacancy Rate+$58.60 Utility/Misc$1,270.55- NOI-$1,465- monthly rent$194.45 Net Profit Income per month x 12 months = $2,333.40 Annual Net Profit IncomeTotal Deal Appreciation: $14,000- (38.25%) ARV was $101,000 Depreciation: $2,345.45- (6.3%) Amortization: $984.58- (2.68%) 1st year loan pay down Cash Flow: $2,333.40- (6.64%)*Property Management: $1,758- (5%) I self managehad script issues with bp website, could not rotate pics.     

My issue is that I cant find properties in my area that are affordable and my 40k is not going to be enough for down payment etc.

You may consider putting some sort of put/call options into the partnership agreement to prevent any issues from arising should you differ on strategy down the road.

I am a new investor and these are some of the issues that I have contemplated as I develop my overall plan.