Even though you should be setting aside reserves for future maintenance anyway, you don't get penalized with financing for choosing to do so vs. being forced to with an HOA.  

I have on the other hand penalized a contractor a certain amount a day or week for them not being done by the agreed date. 

We do not penalize all of our tenants.

Remember, you are not penalized on your loan to claim taxes, insurance, ONE TIME RENOVATION REPAIRS, mortgage interest, and Depreciation!

As a reminder, please submit a waiver request so you aren’t penalized for things out of your control, like when a pipe bursts, the power goes out, or someone can’t agree to your house rules.

1) No last minute bookings, must book at least X days in advance 2) Minimum ___ night stay (I used 2, some do more)3) Must have at least ___ previous stays 4) Must have ___ previous good reviews, no less than __ stars5) No guests under age ____ (I used 30) One of the issues we are worried about is being penalized by air bnb for refusing booking request.

To address your other concerns - rates for DSCR loans aren't always that much higher than conventional, and prepayment penalities can be bought down.

After doing research & learning that declining requests significantly impacts visibility, I'm left with two questions: 1) How would you go about rejecting people to avoid vacancies without getting penalized?

So in this case if you closed the purchase with a DSCR loan, assuming a  Straight 5 Year PPP structure, On year one if you do a Cash Out, the DSCR lender will penalize you with 5% of the loan amount for paying off their loan early. 

Keep in mind there are 8,000 different lenders in the US...so, obviously we cannot speak for all of them...but the absolute best of the best lenders in this space, that have the most aggressive pricing, won't penalize you with 2 points for one option over the other.I would also question that IRS definition - that is not the case.