However, finding homes in WA has proven to be more difficult and expensive. 

2) I am trying to minimize expenses and explore the possibility of securing a construction loan.

Cap rate doesn't apply that well in this business because expenses can skew the numbers greatly.

Quality I wouldn't mind in my house, maybe just a little lower end.Never had much issue with extra wear. 

. - the seller gets the equity and I'm also paying property tax on a higher assessed value (vs. if I bought a distressed house at a much lower price, that I renovated)I'd be cautious buying old homes (e.g. 100 years old) that have been renovated.

Once the 5 years runs out you'll have used up your existing available depreciation but you still get to write off other expenses such as maintenance, property management, legal fees, etc.

If we go off of an average of 35% expenses (I use 35% for properties older than 10 years and 25% for properties 10 years and newer), then we sold that duplex at a 4.75% cap rate.  

@Richard BrownI recommend a consultation with an accountant specializing in real estate taxation to discuss depreciation and deductible expenses.

IE some delta between the lower rate and what they could rent the home for..

I would suggest starting lower for "early birds" and as you get closer to completion raise the rents to market value.