I know I should build rapport first, assess damages and follow up with an offer. really nervous. any input is appreciated. 

As I understand Cash For Keys is to help the tenant relocate and to insure they don't damage your property when they leave.

If you can borrow money at 6% from friends and family, that's a great rate - Hard Money lenders typically charge 10 to 15% (and also charge points up front).I would guess the biggest pitfall of borrowing from family and friends is if the deal went poorly and you weren't able to pay them back, as it could damage relationships.

However, since I plan to re-occupy the larger house at some point, I am particularly motivated to prevent or minimize damage to it. 

However, due to termite damage we're completely replacing the kitchen and bath literally from the ground up.

@Shawn Pottschmidt,That's an almost sure sign of moisture damage.

There is evidence of water damage, although none recently.

We don't want to appear to be discriminatory towards tenants with dogs, however, I have personally experienced my dog destroying the carpet by the door and damage the trim around the door and we don't want this to happen in a newly rehabbed unit.

I would make sure to have clauses regarding damage to the system vs. wear and tear just to make it clear to them that they must pay attention to it or pay for new heads.

Causes damages on the way out?