South Bend is probably the 3rd-most requested campus site, after Indy and Bloomington, because of the annual influx of ND grads. I went to ND for undergrad, and the run-down/depressing facilities were one reason I chose to go to Bloomington for my M1 and M2 years. However, I have several friends who went to South Bend and they have told me that a renovation project is being done, and may be done in time for you to start med school. My advice, if it's possible, is to go take a look for yourself.
If you end up on the Indy campus, there are several different spots around town that the medical students cluster. Lockefield apartments are directly across the street from the med school, so they are good if you don't have a car/like to walk into class 5 minutes after waking up. There are a few more apartment complexes a little bit further away but still within a 20 minute walk. Some of my friends lived in Canal Courts and were happy with it. Away from campus, lots of people live in the Eagle Creek area, including myself. It is about a 15 minute commute to campus, and I-65 goes directly past campus. I also know several people who live on the South Side/Greenwood and use I-65 north to get to campus. Broad Ripple is also a fairly popular place to live because of the high concentration of 20-something people who live there, although it's a little bit longer commute (30 minutes) because you have city traffic and stoplights the whole way. The only place I wouldn't recommend unless you are a masochist for traffic/have some other overriding reason to live there is the Northwest side; Carmel, Castleton, Fisher, Noblesville, etc. The traffic there is the worst in the city and you could easily spend 45 minutes each way if you are travelling during the peak times.
As for the annual influx of 280 M3's, there are four main hospitals (Wishard, University, VA, Methodist) that the students and residents get spread out across, and some M3 rotations are available at other community hospitals (St. Vincent's, St. Francis, Community East). Also, everybody is used to seeing a bunch of students running around, since it happens every year. It all works fairly well and I never felt like there were too many students on a rotation for me to get as much hands-on experience as I wanted.