Once the property is renovated and sells, do the proceeds come back into the new LLC and then are distributed from there to each couple's existing LLC?

If you do decide to have a "partial" 1031 exchange and use some of your 1031 sale proceeds to pay off debt on other assets, you'll just want to make sure that the improvement in cash flow offsets the tax liability that you incur from your partial exchange AND the lower rents from potentially buying a less valuable property with your partial 1031 exchange. 

The other option is to sell it & use the proceeds of that to purchase another property.

My goal is to scale the portfolio and hopefully be able to replace the lost cash flow by adding additional units with the cash out proceeds.

Would that $150k come out of the $500k proceeds involved in the exchange?  

(if the property value is 115k) Then turn around and use the cash out proceeds for a down payment on another commercial DSCR loan to purchase a small multifamily.

I tend to ask them what they plan on using the proceeds of the sale for and if they have thought about being the bank and making that interest themselves instead of a bank.

I appreciate any insights or suggestions on how best to proceed.

Subsequently, I found a reasonably priced unit and proceeded to secure it under contract.

No upfront fees, all costs paid from proceeds. (2-5 days).5. 2nd lien against the subject property from an outside lender.