I'd say eliminate as much of the unknown as possible and get your net worth in places that are predictable and less volatile. 

Most Hard money lenders are going to want 1st lien position and even if everything breaks right and a lender will take second position, a 40k loan amount is so small it eliminates a ton of options- An Asset based Lender at 75% to 80% LTV is your best option if you can not get conventional funding

This can work to eliminate less than ideal tenants in a year or two.good luck

To be on solid footing if there were ever an issue to arise, you really have two options 1) collect rent and then since you are eliminating their use of the unit put them up somewhere 2) provide a credit or reduced rent for the days the unit is taken out of service. 

Here are some thoughts on the risks:I'd say one downside of that is you probably got less rent than you could have because you eliminated 95% of the prospective renters. 

Credit report shows reasonable debt load for verifiable income.3) making our application free and requiring tenants to complete the application before we will schedule a showing.This process seems to cause unqualified tenants to self screen themselves out and has virtually eliminated no-shows and unqualified applicants but I don't think our screening process would fly if our units weren't extra, extra nice.

I realize then trying to find another house I would just end up overpaying for that one eliminating my gains from selling my house. 

If you don't allow them at all, that will eliminate a lot of people.

In a dry climate area like Denver mold should be relatively easy to eliminate.

My view is that if you forego the tub you eliminate most families with young children.