When I told him it would be a very bad time to sell the mortgage notes as there were almost no buyers, he said he didn’t realize we were investing in non liquid assets?  

I have just over $200K left of owner-financing, but I'd like to obtain a cash-out mortgage/loan of $500K (ideally) to be able to pay off the previous owner and make some repairs, etc. 

If your goal is to offset your mortgage with a house hack then Lowell would be a good bet, but if you're looking for a longer term appreciation play then the areas closer to the city would be better, although the offset from cashflow may be lower than what you're looking for.A good step for you would be to dig into specific areas more as @Lien Vuong noted above.

Next, if you do another VA mortgage, VA allows you to take your lease and offset your mortgage payment.

Your anonymity is blown if you as manager/member of your WY LLC sign a mortgage ... i.e. get a loan.If you own property in a revocable trust (land trust) with someone other than yourself as trustee you can achieve anonymity, since that trustee will sign the mortgage.

minimizing free cash flow with larger mortgages or shorter term mortgages takes the cash flow which would be taxed and puts it into the amortization of the loan. 

As mentioned elsewhere, breakeven on cash flow is not the same as break even for taxes.Let's make some assumptions:Rental income = $1000Mortgage payment = $400 - but $300 is interest and $100 is principalOther expenses (repairs, advertising, utilities, etc) = $600Depreciation = $250The above scenario creates a break even from a cash flow perspective, however the tax scenario looks like this:Rental income minus the mortgage interest (principal is not deductible) minus the other expenses minus depreciation looks like this:1000-300-600-250 = $150 LossIf your income is over $150,000, then you cannot deduct that loss, but you can roll it over to future years. 

., Honesty is the most important aspect in mortgage lending. 

Yea thats what i have found out. but i have a hard time scaling since im not able to cash flow. it becomes difficult to keep adding more properties when you have to cover the gap in rent vs mortgage. 

You will be able to find a co-op apartment that allows rentals but whether you'd be able to close on it is another question.Co-ops with poor financials will have trouble selling units to borrowers using a mortgage.