It doesn't feel right to take a monthly loss on an investment property but it could be worth it for the short term. 

Talk to your insurance company - depending on your deductible and potential increase in future insurance you may or may not want to put in your own claim.I would also probably consider cutting my losses and getting rid of the tenant asap.

In a short sale with a partial claim, your first lien position with the FHA loan takes the loss so the claim can be paid in full.

Just as the tenant won’t voluntarily move out before lease termination because I found a tenant willing to pay more, I won’t suffer a monetary loss because they can’t or won’t fulfill their contractural obligation.  

Note this election MUST be made in the year of the dispositions.2) 1031 - There's usually no tax on gains or losses when swapping property for similar property.

. $550  / mth * 8 unit = $4,400 * 12 mths = $ 52,800 GRI  ****not $53,800****The formula for CAP = NOI/PriceNOI = [GRI - V&C loss + OI] - EXP  *****You did not subtract for expenses to arrive at NOI nor include a vacancy and collection factor****Assuming expenses are 50% and 100% occupancy (which 100% occ is not realistic all the time).

The two additional units will be detached from the existing structure so there will be no interruptions from that standpoint.I have agreed to a temporary rent reduction at the tenant's request to compensate for the inconvenience and loss of the backyard during construction. 

In many cases the mortgage company writes off the loss or goes after borrower depending on if they have other assets - if they do then they are gonna be coming after the owner

You as the host take the risk in loss income by not adding extra rooms.

If it takes 6 months to a year to build, that's tons of loss opportunity costs and carrying costs spent. 3.