It mitigates the risk because you can go slow, you are living in the property, and you get the tailwind of 2+ years of market appreciation while waiting to sell tax free on the gains.

They were lucky to get out breaking even or a small loss.

Much of this will be mitigated in the proration of the gain that you will get tax-free. 

In addition, I am hoping to understand the most severe risks that come with investing in distressed properties, and how best to mitigate these risks. 

I'd love some advice on financing options, risk mitigation, and property research.

This approach can help mitigate losses by increasing your margins.

You can mitigate almost all of the risk by just hiring an excellent property manager. 

This way, you might mitigate some risks and get guidance for your first rehab.Single-Family Investment for Cash Flow: Starting with a single-family property in a stable, affordable market might align well with your goals.

An attorney would be able to advise on risk mitigation via insurance vs an entity + commercial loan.

If you choose to sell, consider post-retirement timing, installment sales, or a 1031 exchange to mitigate taxes.