The house is a new construction in a Class C neighborhood.The tenants pay late rate ~50% of time, they damaged part of the garage, they have people not of the lease living there, and they leave trash in the yard.Part of me wants to keep these tenants because:-They do pay eventually-I don't want vacancy-The turnover costs could/will be high-How much more damage could they do?

But if you can finance a home in an appreciating area make it breakeven and at some point (as always) either rents/nightly rates will increase, interest rates will go down, or both. 

You are likely overpaying by $5,000.Broker fee of $3,000 and Processing Fees of $2,000 seem out of place...but then again, i never used a broker to get a loan so I am not sure about that.If the broker was able to get you an interest rate or loan product that you wouldn't be able to find on the open market...its high, but likely fair.if you are getting a loan product that you could have gotten by going to a normal bank...seems high and unnecessary. 

Jon, I have done this and honestly their nightly rates in most cases are within $20 per night of my place which doesnt have a pool.

They have had 100% occupancy at market rates and currently bring in around $2,000 per month in cash flow.

I assume that's because its a relatively cheap project to finish a basement.

Is this expected since interest rates are high and listing prices are subsequently dropping? 

Your interest rates are low. 8.5% is around the "market rate" for owner finance buyers right now...30-yr, fully-amortizing2.

Rates will at some point allow you to refinance.  

The price points do make it hard to cash flow even with the lower interest rate subject tos.