Furthermore, nowhere does it say that the mortgagee is responsible to arrange for the correct insurance to be put into place.2) Even if you are right, and the mortgagee is somehow responsible for your losses (which I doubt), it's likely going to cost you much more than $5K to fight this thing in court.So, while the excerpt you quoted certainly suggests that the mortgagee may have had a responsibility in this instance to which they did not live up, those responsibilities seem intended to protect the interests of the insurer, and this does not, in my opinion, hold them responsible for your losses. 

So in your opinion, this would indeed fall into ordinary income and not long term (or short term) cap gain tax?  

I am seeking opinions from experienced RE investors and/or landlords.  

You'll want to get opinions on repairs from a contractor, and on the management expenses from an actual property manager to get their thoughts as well.

Re-read what @Royce Talbo said for my opinion.  

I have been presented with the following real estate possibility and I am open to suggestions, opinions and/or advise.Home #1- SFH is Brick 3bd/ 1 bth- 1100 sqft-2 Car Garage/ No need for Rehab-Currently Rented at $735 a month with long term tenants paying all utilities-Estimated Market Value $50KAnnual Taxes $500.00Home #2-SFH is Frame 3bd/1 bth- 1000 sqft-No Garage/ No need for Rehab-Currently Rented at $600 a month with long term tenants paying all utilities-Estimated Market Value $30KAnnual Taxes $778.00 Both homes are being offered as a package deal for 45K Cash.

To give me your opinion.

I have not been to a meeting so I have no opinion on it.

Just my opinion.

I need Property Managers, Business Brokers and Lenders to give their opinion on this strategy, please.I'm working with a large Business Brokerage firm to put this deal together and my broker tells me is totally doable.