I would then find a 2-4 unit deal that I could put down a 3.5-5% down payment on as an owner occupied rental.

When you said it came as runnerup, what criteria have you used to select it.  

Those typically seeking $30-$50k are for down payments or second position liens. 2.

I can make the down payments in the smaller market on cash-flowing deals, but these bigger markets require 40-70k to make a deal the conventional way, and I just don't have that to invest.

The one you select really depends on your needs and bookkeepers preference.  

This location is in a 1mm population metro area, 230 units, and cost is about $1,800,000 all in.Limits of Insurance: Coverage:Liability and Medical Expenses$2,000,000/$4,000,000 Occurrence/Aggregate Comprehensive Business Liability$2,000,000 Any One Person Personal & Advertising Injury$4,000,000 Aggregate Products Completed Operations Aggregate$2,000,000 Any One Fire Fire Damage$25,000 Occurrence Customers' Goods Legal Liability Deductible: $0$25,000 Aggregate Sale and Disposal Liability Deductible: $1,000$10,000 Any One Person Medical Payments $1,000,000 Occurrence Hired Non-Owned$300,000 Each Employee Employee Benefits Liability$25,000/$25,000 Per Claim/Aggregate Employment Practices LiabilityLoc Class Desc Coverage Limit Ded Valuation Type 1 Self-StorageBlanket Building & Business Personal Replacement Cost Property $2,100,000 $25,000Earthquake IncludedSinkhole IncludedWindstorm or Hail Included 5%Business Income Actual Loss Sustained 24 MonthsPollution Clean-Up & Removal $100,000Employee Dishonesty $15,000Money & Securities - Inside $10,000Money & Securities - Outside $5,000Accounts Receivable $25,000Electronic Data $20,000Valuable Papers & Records $25,000Fine Arts $10,000Employee Personal Property $10,000Limited Pollutant Removal $25,000/$100,000Cosmetic Loss Limitation IncludedEquipment Breakdown Protection IncludedPremium, Fees, and Taxes: BOP Premium: $ 7,760.00Optional Terrorism Premium: $ 31.00Total Premium: $ 7,791.00Key notes:a.

Those willing to go beyond that could be good partners for real estate investors.Traditional banks/Local Banks and non-bank lenders - If they are a portfolio lender, meaning they actually hold on to the loan and don't just collect your payment, then they have the ability to be flexible.

Just curious - what sort of down payment do you usually require of US citizens? 

I have construction loan on the current house I'm building and used similar strategy (land was purchased outright and used to cover majority of the down payment).

If you sell a property, and do a 1031 exchange with the proceeds, but don't need all the proceeds for the down payment of the next property, are you taxed on the additional profit that isn't part of the exchange?