@Jim Brandt , Unfortunately, a house that is in your name and used for personal purposes for more than 14 days during the year, or more than 10% of the number of rental days if greater, is considered to be a residence (not a primary residence).You are deemed to have used a property for personal purposes when it is used by: Anyone who rents the property for a price that is less than fair rental value.So the house will not qualify for rental property or investment property. 

Roof is fairly recent, no signs of leaks anywhere, basement is dry.

From those one looked fairly good, well managed on the upswing as a new owner had come in and started remodeling and kicking bad tenants out. 24 unit complexList 565,000Purchase Price 535,000Gross Rent:138,000Less Vacancy(10%) 13,830Operating Income 124,470Property Tax 8,837Insurance: 6,900Management(6% after vacancy): 7,468Maintenance(6%): 8,298CapEx(6%): 8,298Water: 8,400Waste: 2,700Electric: 8,400(laundry room, hot water heaters, security camera's)Cleaning(unit turnover): 1,800Landscaping: 600Operating Expenses : 60,301Net Operating : 64,169Loan Payments(100% financing): 42,369Cashflow:21,80024 units - 16 2bedroom and 8 - 1 bedroom lofts.

What would be a fair scenario to present to our friend that would benefit both of us?

I am selling to him for a very fair price and yes I want to sell it but if it doesn't sell now then so be it.

I’ve thought about new Milford but also concerned if flood zones and further on coast closing into Rhode Island like new London, new Saybrook, mystic area I see some fairly inexpensive homes however those by water seem more difficult to find.

It's a lot like a mechanic...if they are fair, can do good work quickly, can make professional recommendations....that would sound like a good fit to me. 

What would be a fair return for the cash provided up front?

So many moving parts and positions that could be played.

If you let the tenant know that you will handle the matter fairly and honestly, they will have nothing to fear.For the future.... it's best to do periodic inspections during the tenancy and to charge for damages as they occur or as you discover them.