Your ineptitude may amplify your losses:(You're also jumping to assumptions.We've had out-of-the-county investors that we could NOT legally send funds to because they hadn't supplied us with the IRS required documents - and they didn't respond to our numerous communications to get them.Once we obtained the proper documents, we sent them their funds - by the way, we did send monthly Owner Statements, so they had the info to see what was going on with their portfolio.So, that brings up another question - what information have they been sending you and when have they been communicating?

What if you require more rehab $'s than originally estimated?

I have a free and clear, rented property I intend to keep for now, but want to get a loan to pay off another property's loan to 1031 it with no mortgage balance. 

Our property doesn't meet the zoning requirements, so the decision has been made for us. 

I have the remaining balance in cash but that ties up a significant amount of capital and overall isn't really justified in the ROE.

All those things require maintenance. 

In addition to this what else can I do to protect myself and ensure that they don't take anything more than is required from that security deposit?

If smoking isn't a requirement, it isn't a requirement.

Annually, the Management LLC would "distribute" to the Property LLCs, but it would all flow thru to your 1040 Schedule E - unless you get partners, which would require a 1065 return with K-1 distributions to the partners.

Maybe try calling your local Housing Assistance Program (HAP) office and asking them about this requirement.