In Regards to the AFR, yes you are right there will be an IRS tax implication if the rate is below the AFR rate (which for non-federally subsidizes housing is 3.75%, I think) That's a nominal risk, and is offset by the income/cash-flow from the property.

I don't think I qualify for any conventional or FHA loans as I don't have long enough income history.

The fact is, I need the extra income STR rentals bring in and don't want to leave any money on the table.

Form an LLC:Purpose: Establish a separate LLC for the rental portion of the unit.Ownership: Lease the rental space to the LLC, which will handle all rental income and expenses.Lease Agreement:Internal Lease: Create a lease agreement between myself (as the homeowner) and my LLC (as the tenant renting the rental space).

You can't deny based on non paycheck income source. 

These types of loans are not dependent upon your income but more on the cash flow of the property itself.

Interview a couple of management companies and get their income projections, but definitely be conservative. 

Credit scores are an important indicator of tenant worthiness, but I have also heard that $60k a year (in most markets) is the magic number/ minimum income number for most good tenants.

I have been told that many large corporations are cutting internships, traveling nurse levels seem to be dropping off and general travel seems to be down.

Personally I would rather have the $260k now and invest it and get 8-9% than $100k now and get 6.75% over the next 30 years which is taxed as ordinary income...