To your questions though, my clients have not experienced the dramatic loss of negotiating ability that you have illustrated.

Alternatively you could use Section 179 expensing here as well, but the expensing can't create a loss for the rental and may be carried forward.

That's to their advantage, not yours.My guess is damage will be tough to recover. 

BUT this applies to experienced builders who have a strong track record of successful projects without trailing loss history.  

Doing a 203k on a multi can be challenging, depending on tenants so your best bet is to get one vacant, but then you are at a full loss while construction is going on.

Passive Activity Loss RulesIf you are a real estate investor that doesn’t qualify for REPS status (discussed in #5 below), understanding the Passive Activity Loss rules is crucial.

Real estate/passive investments are already preferential when it comes to taxes since they usually show a loss on paper and the income is not subject to SE tax.  

The appreciation is probably worth more than the cash flow loss, which I am okay with at this point, but it does hurt to see it bleed.

I ask because it seems like you have two clear choices - Either finish the rehab and sell potentially at a loss, or hold the property while renting it out so you can hopefully benefit from gradual appreciation and using the rent to help make any principle paydowns on any loans you may have. 

I'm mainly trying to just figure out if the year 1-5 loss of around $38,000 is still worth it in the long run with the sale price covering that loss plus about $250,000.