This could increase interest rate and or down payment.2.

This increases the likelihood that they will reduce or reject the claim.

What would you do from here, pay them off sooner to increase the cash flow, or keep leveraging? 

It wasn’t how I wanted to kick things off, but I worked with a contractor to get the bathroom fixed and functional.Once that was behind me, I focused on improving the building and maximizing income:I installed a shared washer and dryer for the tenants, a major upgrade that added convenience and increased the property’s value.I rented out the two garage parking spaces, bringing in consistent revenue.I also raised rents for the second- and third-floor tenants I inherited to be just below market-rate.

In most markets it is not a linear price increase.  

How are the sellers being protected, in the event things change, vacancies increase and mortgages can't be paid? 

It sucks to admit that there wasn't tight oversite on the deal to ferret this out b4 the sale happened and its subsequent consequences and it sucks for your client that they have made, for at least the time being, an investment that is not going to be in the black in the immediate future. 

It establishes a base that's $40 lower, which all future rent increases are based on. 

The mortgage has gotten out of hand due to property tax increases, miscalculated escrow, and an increase in my interest rate from an initial buy down, increasing from $2600/mo to $3200/mo.

The appraisal came in at 490000k arv and the comps pulled and increase in home value since a year ago shows the property at around 515000k.