There are probably many STR owners that would be happy with just the $25k CD return you could earn risk free. 

However, getting from simple Phase I/II due diligence to developing a remedial plan can be a large and complex process and costs would have a wide range until more is known.

During the build process, money is spent but income waits for the unit to be rented after completion.

The bigger issue is you need the ability to manage the entire process. 

Obviously, the interest I earn from lending would be taxable income, but how would the initial investment be treated for tax purposes?

It forces users to manually split mortgage payments into various components every month, has a painful process to start new mortgages and close out existing ones, and generally has a miserable process for handling everything around loans and amortization. 

The next step is to pull out some cash typically a cash out refinance and use that cash to put down on another investment property.Are you strictly using your liquid reserves/earned income to buy versus using the equity to pull cash out?

My concern is more on your vetting process, because that is where the eviction risk lies.

There will be challenges that need to be overcome throughout the process but with persistence, drive, and education; any obstacle can be overcome and the outcome will prove worth the effort.

If you were to keep the house as a regular (not lease-purchase) rental, you say you'd earn maybe $800/mo in cash flow.