The compounding impact from reinvesting cash flow far outweighs even a 15% appreciation. 

Will the potential damage to the home outweigh the benefits? 

There would still be two closings here as well so I think the total costs here would outweigh option 1.3- I have just started looking into construction/rehab to permanent loans.

Obviously you need to conduct a feasibility study to determine if demand outweighs supply. 

If you do not complete extensive research then you are just guessing what might make an impact implementing into your property and business instead of having a high likelihood of knowing and stacking odds into your favor.Hotels are a more intensive asset class that can require daily management versus other commercial asset classes so you have to make sure the reward far outweighs the downside risk.

The interest expense is greatly outweighed by the following benefits:Ability to buy more properties faster, rather than saving up cash for each oneROI is heavily amplified by having leverageAbility to deduct interest on taxes Time value of moneyRegarding early payment of loan: if you have $10,000 sitting around, and decide to put it towards paying down extra principle on one of your loans at 5%, it will save you exactly $500/year.

Does the risk of a fine get outweighed by the reward?

All this opportunity can some times outweigh what you pay for a small space, especially when it means you're now in the network.

I realize my taxes will be a bit more due to this, trying to see if the benefits outweigh the costs?

I wasn't sure if the income i generate from income generated from the property was enough to outweigh the debt tacked onto my credit.