(I'm thinking adding 2 Beds and 1 bath, or maybe a master with walk in closet and an on suite, a large corner home office, etc. raise rent to $1,600)Needs: Roof, Siding, and Basement Work (potentially more space if the basement is redone, adding a bedroom and bathroom, rent at $1,800?) 

With careful research and property selection, it's possible to find properties with good cash flow potential.

@Michael CaldwellI think the type of transaction is more important than potential tax consequences.

My investment approach required fixers with good value add potential.  

What makes the rental appealing to potential tenants? 

I know we just bought it but I see huge upside/potential.  

Hi folks, we are looking at potentially retrofitting an existing SFR with sprinklers in Seattle (city code might require for a new backyard build).

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

For example, you could find deals that have good long-term potential and buy enough money down so they throw off a bit of cashflow, but not so much equity that it limits your ability to scale.

But the house is only 10 years old, it's huge, it's in a decent area that's still being developed (Eastern East SF Bay Area), and it has the potential to earn us some money.Does the earning potential of the house make up for the headaches of renting in CA and having to pay a boatload of taxes on the equity when we eventually do sell?