Cognitive Biases or expecting everyone to make the same rational decision based on the same information.  

My Grand Mother was a deppression era kid and used to tell us about eating ketchup sandwiches pie coffee sandwiches, then, and later when goods were being rationed.  

Curious to hear your thoughts on why this happens, because I can't come up with a rational explanation for an appraiser to single out investors seeking loans as a class.

Now, sometimes passing on an opportunity is  rational and appropriate decision, but its more likely than not that they aren't doing it consciously. 

With higher cash flow on a 30 year, your debt to income ration increases with each property....

Am I just rationalizing a bad investment strategy here? 

Make sure you don't rationalize your answer to that question...just like you're rationalizing now.

Maybe I'm stating the obvious, but instead of trying to prove or disprove the 50% rule, I'm trying to rationalize why it would work so well.It seems that natural market forces will drive the expense ratio of a property to some sort of "equilibrium" that would be the same regardless of the region or type of property.

That being said if your objective is to cash flow then -$100 month is not a positive cash flow situation no matter how you rationalize the investment. 

It says you get a pro-ration of gain up to your 121 exclusion, which is what @Michael Plaks said.