I cashed out my 401k after loosing my job and I would like to invest in rental properties in New Jersey.

As far as your note about the rates going up, assuming a bank let me do a refi after the two years if the rates went up maybe 2% I would loose the PMI with the refi wouldn't that wash or go up slightly?  

If I keep the rent they have, I will be breaking even on and will hardly have any cash flow, is it worth raising up the rent cost with the possibility of loosing the tenants?

You will be bound by the terms of the leases.

I went over and signed the agreement (3 years, 10% PM fee) at around 1130, dropped my daughter off at school and went to work.Then all hell broke loose. 

How to prevent loosing a rental that's in tax sale with no money and tenets that need evicted.

Danger - if history repeats and you are 100% leveraged there is risk that might loose all properties  plus your initial investment plus time spent.  

@Chris Bounds hit the nail on the head.

(it seems like over the course of saving up even 5 years this makes sense, but there is also the risk I could loose it all and end up with no money to invest in the real estate)2) How much cash will it take to get started with a really solid property in Chicago, IL?

Makes a better fit for loose outlets and covers up any knocked off mud/plater/wall board around the outlets.