It might be useful to compare it with what you could do with the money otherwise.
This is what I did, to try and figure out whether to buy to let at all. Flats like ours currently rent for around 1/300th of the property cost, or 4% annual return. That's 2% taking into account MMM's 50% rule of thumb, or a negative real return (inflation here is 3.5%), and not smart compared with investing the money elsewhere.
Hence, I don't own any buy-to-let. For you the equation will be different, hopefully! but you can still do the same math (what would I get if I invested the money instead, vs the extra rent it would generate).
The difference is this is a duplex, meaning he can live in one side and rent the other. And then when he moves, rent both.
Plus real estate is very local. I'm picking up things in the 70k range and renting for ~1-1.1k. Latest purchase (closed two weeks ago, still putting in paint and carpet) was for 58k, should rent for 900-1k. It turns out to be a nice return (using the 50% rule). So we can't say, based on your scenario or mine, that he should. Like you said, do the math.
I'm assuming (hopefully correctly) that he has, since he's going forward with this and it's closing at the end of the month.
Going back to the OPs question...
My problem is I don't quite know how much capital I should really throw at this project.
The bathroom is lacking a shower and could use some remodeling so that is priority #1 (so that I can shower vs soak in a tub while living there).
The entire house could use some replacement windows.
I should really get gutters all around to protect the foundation.
There's some plaster work that needs doing.
The exterior needs some paint and my half needs a lot of it on the inside.
The hardwood floors could really use some refinishing.
The brick could stand to be sand blasted and repointed.
There's various other small things that'd obviously add up.
Here's the thing.. if this is a long term buy and hold (for years and years).. do it right. The first time. Right now. It will pay off.
This article (posted two days ago on BiggerPockets), says a similar thing in a case study:
http://www.biggerpockets.com/renewsblog/2012/03/05/first-real-estate-deal-of-the-year-a-case-study/ From the article: "As a buy and hold investor it usually pays to do the correct long term thing the first time, instead of limping along."
I know it'd be tough to estimate having not seen the property first hand, but how much is too much to invest into a rental unit like this? Is there any rule of thumb I could base some decisions off of?
Not really a rule of thumb, but it's something you'll want to consider when running your calculations to determine if it's worth it to purchase the property at all. Like Dave said, do the math.
Assume that you fix everything AND pay someone to do it. What will your total all-in costs be? Then determine ARV with comps & cap rate, ROI, etc.
(Then, when you do the work yourself, you pay yourself in equity for it as an extra side job via sweat equity, but don't count that "free work" as not costing you anything.)
A property that needs a ton of work may not be worth it, so to do apples to apples comparison, calculate what it would cost to get everything fixed up perfectly, then run your numbers based on that.