You are entitled to receive a house back just as whole as you delivered it.

Perhaps you have coverage for the replacement value BUT the insurance company when calculating the replacement property uses modern building materials like drywall but your original house had plaster which is much more expensive.

I am looking at different loan options but to break even (not having to put any money of my own in the house after the initial down payment) the current down payment required is that much. 

Houses out here cost average $1.3M and rent for $4,000 per month. 

Paying those things benefits you because they facilitate STUFF exiting the house. 

Other KPIs and considerations you should evaluate when talking to any lender who offered private placement of loans/notes are historic default rate, how quickly they can place your funds (do you get preference over their income funds, for example), average interest rate - borrower note rate and what is passed through to you, are loans serviced by a 3rd party servicer or in house.

Are you looking to do more rehab projects like this (either house hack or not)?

why on gods green earth would you want to buy 10k condemed houses :)  seems like a waste of time and money to me.

Section 8, nice housing!

My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance.