I feel a loss of direction and that makes it really hard for me to focus and build.Do we keep at building a portfolio of small multi family (very abundant in my market, very rare to find anything above a triplex for sale), with plans of selling the portfolio and 1031'ing into larger properties? 

It's simply factual:  you violated the lease by smoking, stop it, remove the resulting odor and that a repeat action could result in eviction and loss of security deposit.  

Trying to cut my losses as the borrower got all her unsecured debts discharged through Chapter 7.

I do want to point out though that Cleveland's population loss has finally stopped.

Loss of rental income is only covered if it is listed in your policy.  

Of course we can cut our losses and switch.

I just can't accept such a constant ever increasing loss, even if I can afford it. 

Having lived there a year it is a foreign country and many things are different and culture etc plus you have the native peoples that own huge amounts of real estate and They dont pay income tax and they get food and gas for way cheaper etc etc..

Two main reasons being: (1) debt does not increase your basis in an S Corp, which means your losses get limited.

Over the course of a weekend—and fueled by beer, food, and sledgehammers—we completely cleared out the space.