So that will be vacant and having losses during rehab.

I’ll be out of state, which I know is a big red flag for many.Well below 1% minimum of Rent/Property ValueHoping to self-manage (Yes, another big red flag)Loss of capital gains exclusionMONTHLY SUMMARYRental Income $3,500Less ($3,440) Mortgage (2,900) HOA (390) Rent Ins (150)Less ($1,155) Property TaxTot Exp ($4,595)Rev: ( $1,095) !!

Unfortunately their home was a total loss due to a tree falling, so I have agreed to rent them my STR as a long-term furnished rental while their home is being rebuilt. 

Because Puerto Rico is a territory, the U.S. has vested interest in helping the island recover.

My cash out will be 66k, which is very exciting, but I will need a 16% return to justify the loss in cashflow. 

Often times the individual has long since recovered from what caused the derogatory in the first place--i.e. job loss, divorce etc.

Say you start a STR and use the loophole to write off 100k from W2 salary. 2 yrs later the rental goes underwater and you have to give it up at huge loss.  

You quantify losses due to withdrawing your 401k - then you leave the real estate investing completely vague.

You found a new tenant immediately, so there's no financial loss to you except for the time spent marketing, screening, etc. 

You still cannot benefit from pass through depreciation and carry forward losses to offset tax liabilities from their active source of income.