When you sell a property that has been depreciated, the IRS requires you to "recapture" the depreciation deductions, taxing that portion of the gain at ordinary income tax rates.

Combine that with insurance raising rates not just for dropping licensee count, but also to cover increased lawsuit risks.

Comes with a known rate, a known term, a known payment. 

Rental rate?

The only other option that comes to mind is to make the improvements and try to achieve favorable rental rates to push the story that 2 BR homes rent for a premium because its unique.

There are many STRs that do quite well in the suburbs of major cityies Off the top of my head, I can think of one of the STRs we manage that is 40 mins outside of Dallas and it has a great occupancy rate.

Higher inflation equals higher interest rates. 

Personally I would want to manage the rental myself at least in the beginning to make sure you get good ratings.

So this is creating more competition and more agreesive rent rates and/or concessions like 1 month free to get those vacancies filled.

Not many markets out there in post covid era with 'great cashflow' now and definitely not until rates come down.