I put my money where it’s going to perform best, either in real estate or my brokerage account in the form of an S&P 500 index fund.

Based on what I read here you are likely to have a better life and better ROI by investing in an S&P500 index fund.

If you really want the list of all REO departments and asset managers, nationwide and indexed by states servicing, try the Lane Guide. http://www.laneguide.comThey have the best and most up to date list I have found.

You could be a private investor for a house flipper, but then you would be the bank and I am not sure how that would sit with your faith.I would park the money in index funds if you can't do syndications just because you are restricting the possible use of your money in real estate.

Give the cost of money these days is around 7%, it would definitely be nice to have a paid off rental.7% cost of money sounds like a lot until you remember that it is actually the tenants that are paying it for you while your money is sitting in an index fund making 8%.

I would say consider a low-cost index fund for now. 

And a little skepticism that the market would continue to grow at 5% or more on average (it's been ~7% average for the 8 years I've lived here)@Dave Foster I filled out the BP spreadsheet here for the sell or rent decision, and similar to you advice, selling and investing the profits in index funds performs only slightly below being a DIY landlord, making that seem an attractive option. 

As @Chris Seveney mentioned there is not really enough equity in house 3 to get a meaningful LOC. even if you were able to leverage enough to pay off House 2 the new rate you would be paying would be higher than the existing mortgage, so you would still be behind overall.Your ROI on those payoffs vs keeping money in index funds is not very good either.Lastly, remember that cash flow from rentals can seem good until it’s not.

Sock that money in boring investments like index funds and focus on reducing your living expenses. 

I could alternatively put that down in a index fund for S&P that gets about 8-11%.