I am trying to calculate my returns over a 10-year period using the rent-by-room strategy, which results in significantly more cash flow than traditional rentals.

They are now selling resulting in a 100% loss for investors. 

Purchase price: $5,000,000 Cash invested: $1,450,000 Complete combination and gut of two lofts side by side resulting in a 4,000 square foot home.

Some take on the business w/o having the proper systems in place to deal with low-demographic tenants & properties.We also see owners being part of the problem - expecting Class A fees, service & results from their Class C & D properties.

I also agree that RE appreciation is unlikely to match the last dozen years, but you never know.Where I am unsure we agree is that paying $450k to improve the cash flow ~$3k (your numbers but I expect my delta wold be similar meaning both my cash flow estimates would be worse than yours but both would be worse by the same amount not affecting the difference) makes sense especially if the cost of having the extra $450k is only 6% rate which is historically simple to beat via numerous investment options and hopefully no one is investing in RE for an expected of 6%.  

I think the main thing people would point to as a red flag for Ocala is that it is not a large employment center like Orlando, Tampa, and Jacksonville and as a result may be more exposed to a pull back in values when there is a downturn. 

I don't disagree I think it's a great option and it also allows you to use the money that your employer has matched if you think about it. 

And if this is illegal in some states...what exactly is illegal about finding interested investors and matching them up with a funding source?

Focus on what matters, not on things that have nothing to do with what drives the desired  results.

They must sign the form.The IRS offers an online tool that lets you check if the tax ID the contractor gave you matches the IRS records.