@Steve Hall so its fraud to use “spend down” to make home improvements to a condo in a trust?

well what I would do is tell the seller the house needs 45k.. and since he holds the first you are improving his collateral therefore its safe for him to take a smaller down payment.Maybe offer to escrow the rehab funds so that if you say your going to rehab but don't he can go in and grab his 25k that is not coming to him in the form of down paymentlet him be in control of that 25k in some manner.. that may work.Its just like when I tie up development ground if I have a very cautious seller..

This property still cash-flows but definitely under performs (due to flood insurance in my opinion) compared to the others.

To finance, use lease option to be given permission to use a property however I want, improve it and rent it out.

The property is in Stoughton WI, no improvements were made and leases are below market due to previous landlord.

As mentioned above, that doesn't leave you with much room for error in case any significant capital improvements are necessary. 

@Hen Ley Hello.There are many portfolio/commercial lenders out there that will provide loans based on the performance of the property.

A good contract will impose performance standards that will protect you in that regard.

My question is if I sell a current investment say for $200k that I purchased for $100k and made $50k in improvements (so $50k gain). 

Otherwise you'll be in the same situation that the people you are buying from are in.It takes a special skillset to take a non performing rental and make it profitable.