I don't agree with this exact order but to be honest and fair, there is more than one way to do it right.

Quote from @Sebastian Bennett: It's funny because I actually had a dream of setting these up and seeing how this would play out lol

I am also considering selling the property next spring so this would be the last lease and I don't to play nice. 

It's a really high-energy dog and I don't think they take it out often enough, so they play indoors a lot.

What incentive is there for them to perform well on the deal if they have already made 18k off of you and it is only your money at play. 

I accept them and mitigate the risk by (a) screening the animals, (b) having a solid set of rules that are quickly and fairly enforced, (c) regular inspections, especially for cat units, and (d) charging a monthly pet fee.Let's say I have five single-family homes.

Like with anywhere else: location, pricing and the overall house you intend to build will play a factor in your profits.

So, you're not "wrong" in thinking it's complicated.The tax code plays heavily into how certain transactions are categorized and there is some flexibility regarding what we can capitalize versus deduct.

Preference is cash-flow, but open to appreciation/equity plays as well. 

So some grey area on what you may find reasonable and what perhaps some hopeful tenants find reasonable and be sure to not violate any fair housing law in setting occupancy standards, but I generally think most renters are reasonable on if 3 adults, they are looking for a 2 or 3 bed rental and not a studio.