Little paint and the contractor I found let me buy the material and only charged me labor.

. $40k will not get you a non owner occupied San Diego property unless you find some unlikely alternate financing.

Due to inflation and the drastic increases in material, labor, and supplies, that's naturally caused carriers to rethink limits/values on file. 

We had to repaint the entire unit because the material he used left oil stains everywhere.

To remedy that, the carpets should be ripped up and sealant applied to the subfloor, at minimum.There are also tiles in the smaller upstairs bathroom that are lifting up and creating a safety hazard; putting a rug on top is not a sufficient solution.The house is in a condition that materially interferes with the health of household members.

Banks who offer construction financing tend to be 75-80% LTC and alternative/hard money lenders will sometimes offer higher LTC leverage than that.

There are also others who assist in teaching you DD.Another route is to find a broker-dealer who invests in alternative investments like real estate funds as they will have done a lot of DD on the sponsor as well. 

I had an experience with a terrible tenant who reported me for a bogus claim but by making the claim it allowed me to gain access needed to get photos of the condition of the property, and then the tenant refused to allow maintenance people in which really helped prove my side of the situation.If possible, explore alternative dispute resolution options like offering the tenants a cash-for-keys agreement.

So, you're actually making the argument *against* debt (not for it).I think you mis-understand debt, risk and the alternatives.

Best case under such circumstance is they find alternative financing and simply over paid for the property.good luck