With all the improvements, I'm estimating the house value to be around $275K (conservatively).As I mentioned before, I believe her appraisal value is inflated, based on the avg. house value per square foot in this city and based on recently sold houses with similar features.

Markets are always change, inflation happens.

Once REI becomes "cool" and "hip" again, the people who don't know what the heck they're doing will come in and drive the prices up, over-inflate the market again, and cause another crash (even if its not as bad as the last one). 

One has to ask if the provider inflated the rent amount to justify the selling price to you.  

The real question is the same I posed to Eric -  can an investor get positive cash flow with the inflated prices here right now, with these prices?

I'm afraid this scenario is making a crap sandwich because the lower end of the market is being inflated by incoming investors but the higher end of the market is limited by what typical buyers (people with jobs) can afford.

Profit is derived from sold price minus expenses, so if the development costs inflate and or the sold price reduced, you eat into profits and that is not affected by the LTV.

It is in a good market (DC area) but far enough on the fringe that prices aren't ridiculously inflated.

Ok if you are a doctor or something and believe inflation is on the way.

Lastly, the price of the house is determined usually by the going inflation rate time the length of the lease.