The issue is that it does eat into my free time, which is very precious to me (I also don't have a lot of it).If I want to exit I guess I can look for an institutional buyer at around 5% cap?

Based on the improvements and upgraded cash flow the NOI capped out much higher so I was building both equity and cash flow.

When calculating cap, and other deal analysis criteria, none of them talks about how to assess the property in terms of its appreciation based on structural quality such as brick exterior versus vinyl.

Just recently the city (rightly) instituted a CAP on vacation rentals.

Nashville sucks for house hacking as most of these properties can barley cashflow anything above a positive cap rate.

That can make you look at it from the eyes of a residential buyer and not an investor. 3.6k income with PITI of 3.9k is already under water not accounting for vacancy, repairs, and cap ex.

Taking advantage of Section 121 and getting as much free cap gains as possible would be my route (Option 3), but you'll likely hear different responses from different people. 

Otherwise, it seems like a loop hole to avoid licensure, insurance, cap gains, etc...which feels deceptive.Am I wrong here?

Hopefully it was something that is generating return.Hopefully your 3% cash flow includes reserves for maintenance/cap ex.  

In a market where I would expect to see 8-10% cap rates, I’m seeing things go at 3-4%.