Then, run a rental stress test on the new STR assuming a worst-case scenario—like converting it to a long-term rental with a 30% cut in future rents.

My gut says I need to cut off of this deal,  but curious to get your perspective.

Most spend too much of their time and resources on the set up and completely ignore the day to day responsibilities and/or cut corners and costs where greater attention and resources should be spent.  

There is no short cut. 

There is a range of DSCR lender underwriting policies for "1st time investors" - some don't allow it, some do with no restrictions, and some in the middle (typically cut max LTV by 5% or so and restrict against anything over 4 units)Also - check out these BiggerPockets articles for a ton of info about DSCR loans:DSCR Loans: What Are They And How To Get The Best Termshttps://www.biggerpockets.com/...DSCR Loans: How To Use Pro Strategies To Save More And Make Morehttps://www.biggerpockets.com/...Multifamily DSCR Loans: A New High-Impact Loan Option For Real Estate Investors?

Upper levels with slanted roof lines cut into living space which is very outdated and much of it becomes deadspace. 

Someone has a gas stove and the new rental only has electricity; someone has a 33 in fridge and only a 30 in fridge fits; counter space is cut for slide in, not drop in; etc.

So as investing partners it makes sense because we will both have extra cash at the same time, we partner up to cut the risk in half + we both specialize in a couple things the other does not in terms of being a rental property owner (e.g. running the books + marketing vs actually fixing things).  

Further, I had negotiated 12 months interest reserve; they cut that to 3 months.  

So I'd be doing my best to get the highest possible rent/revenue but without needing or counting on that.What you refer as cut-throat competition exists in every market where you have demand.