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

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

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 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. 

Every time it was handled differently  LOLIt should still be up to 25% (it could be less if your marginal bracket was less, but its not in your OP).Incidentally, you can offset the depreciation recapture with capital losses.  

When there is a storm, the entire state sucks up the losses by raising premiums.

-If the person dies later than expected, I face a financial loss. 

the property with the most 3-5 year stuff should be on your short list to sell now if you're cash-strapped and you can at least cut your loss without having to inject more cash. 

In addition, the lender is going to incur costs including losses do to the time value of money if you stop paying and they have to take the property back.