The STR, if purely an appreciation play,  is speculation to me. 

Selling now avoids capital gains tax and lets you reinvest into a new primary home and a solid rental property, which feels like the safer play given the cash flow challenges and ARM timeline.

Thats going to play a big role in your options i think

I have been through the BK route more than a few times in 40 years of HML ing.. and as Don states it can be just crazy what happens what the debtor will do what the BK trustee will do what the judge will do.. that all said if your position in the note is discounted enough probably still worth it. but in my mind to pay 90% and if there is not SIGNIFICANT upside I personally would not do it unless you have a repositioning play or something that no one else sees. 

Most gulf front investments are mostly appreciation plays unless you do a serious renovation.

If you're aiming for growth and can secure a low-interest mortgage, financing might be the better play.

2) Using our HELOC to supplement the down payment.. we do have some bonus payments coming at the end of the year we could pay it down plus the tax savings could help us pay it off, so maybe it would be worth it in the end? 

It's good to hear that you want to play the long-term hold game as that is how you'll ultimately build equity.  

I have a contrary play. 

This campus hosts a large Magnolia home goods store, high end furniture store, cupcake bakery, coffee shop, gardening shop, live music concert venue, large grass area with toys and balls for kids to play with, an open plaza with eight food trucks, a small baseball field (that Babe Ruth once played on and families can now play on for fun), a restored historic chapel (the oldest chapel in Central Texas), and six boutique shops with men, women, and children's products.