Also looking to take a loan out on this paid off unit.

Little cabins have very little value.Maybe try for a commercial loan as a business?

Investors may like the income on the spreadsheet, but the appraiser for a traditional loan won't care.

They used that period of unemployment to skip paying student loans and then try to get some kind of program/hardship deferral or something aka "gaming the system".

And the "hook" is that it's paying 12%+ interest distribution plus depending amount LOANED (one may say invested in a note but again, if a note is a loan, it's not investing is it, it's a loan, a loan is a loan is a loan). 

From a $ perspective you get the same amount of appreciation, depreciation, loan pay down, but here you have cashflow and if if a tenant moves out, you are only 50% vacant instead of 100% vacant.- Generally the same logic applies as above.  

While this might not fetch the top dollar, it could result in a quicker sale at a reasonable price.Consider Renovation Loan Options: If you believe the house has significant potential value once fixed up, exploring renovation loan options like an FHA 203(k) could be an option.

Between Oregon and AZ residential and commercial we have around 23 units with only a couple of small loans.

Bank loan How did you add value to the deal?

Keep the loan local.