I disagree with some of the analysis here.

First off, congrats on being in a position to scale your real estate portfolio.

Because after purchasing the new rental for $700K that leaves them $300K initially, so take $260K to pay off their mortgage, and still enough left to cover a good chunk of the taxes owed. 

Given the fact that if  there is a gain a future year the prior year loss can offset it, it seems that one would want to file the loss so they can offset that gain.

Never lend in second position unless you have the wherewithal to pay off the first.

The guru your son is learning this technique from is likely not telling your son that the deal will almost certainly encourage your son to get an "off-market" deal from a "wholesaler" who is unlikely to properly disclose the details of the property or encourage an inspection. 

You won't find one PM that hits all 3 markets as there is a pretty decent distance between the 3.

Why pay off the mortgage early? 

If the numbers work, the numbers work.

I am about to settle on an established rent-by-the-room that is within the same few blocks.