This setup alone feels like a solid foundation for financial freedom.Here’s my dilemma:While I understand that my mortgage interest rate is very low (2.8%) and there are tax benefits to carrying the debt, I’m wondering if it might make more sense to aggressively pay off the loan.

In its current state:Current NOI: $79,058 (based on 80% occupancy).Current Cap Rate (at $1.25M): 6.32%, reflecting the property’s as-is performance.Value at a 7.5% Cap Rate (Market): $1.05M, based on current NOI.Given the renovations, vacancies, and risks tied to stabilizing the property, I’m considering offering $850K to reflect its current state and value-add potential.

As Sean above alluded to- never pay a seller for your future hard work, risk and stress. 

Appraisals, Lenders and Rates : Beyond the transactions that were literally in process (sales, listings, leases, seller carries) are properties that remain amongst vacant lots.

Better advice is know the risks, mitigate the risks the best you can. 

He didn't have to do that...you're carrying him). 

Risk mitigation is crucial, and learning from past experiences is beneficial.

Quote from @Michell Chase: I am working with a hard lender on a purchase/reno and they require a builders risk policy even though 1 unit of the 3/4 will have a tenant.  

Agreed with the other comments about the higher risk with HELOC in this particular market.

Your income isn't high enough for it to make sense as a rental and the closer you get to your residence limit the greater pressure you will have to sell it before losing your exclusion in whole or part. 500k right now can make $15k per year income with zero maintenance or tenant risks.