Also I'm aware of the other drawbacks of 401k loans so I'm more interested in any potential pit falls of this strategy on the real estate side.

The major drawback I can think of is higher HOA fees due to salt water damaging exterior building and heating/cooling units, as well as higher flood/hurricane insurance, or higher reserves needed for potential future storm damage.Some HOAs have strict restrictions on rentals near ocean to protect long term owners. 

There are drawbacks.

I was partner in a 50 condo deal and we noticed during our due diligence that this was one of the major drawbacks in multi-units.I also prefer the quality of tenants that come with SFHs.Bob Hines - I appreciate your input.

The only drawback is you have to know how much the rehab is going to cost so you can get the right amount of money in the loan.

Just another drawback to CFD, is the fact the seller can still encumber the property even further voluntarily, or have have liens attach and then be unable to come up with the money to cover everything and can't close at you contract price.

Now when I look at this current REO, I see the total lack of a condo association as another big drawback for this property because if the buyer finances it or even uses it as partial security on a line of credit, their bank is going to want to see the condo association documents if they're anything like my bank and the lender for the buyer I sold it to.

The one drawback is that renters will often only heat one room with them.

The other thing that may be a drawback which I first thougth was a positive is that this house has a HUGE back yard.

But the CFLs have draw backs such as the mercury, which makes disposal a challenge, and they are not a good choice for outside applications (they don't do well in the cold) or in fixtures that are turned on/off frequently, like bathrooms.