If you are doing a true full gut, you have the opportunity to "re-layout" each floor plan to maximize the amount of space, therefore possibly increasing your bedroom counts, therefore increasing your cash flow and value of your building.  

There is always the chance that you can find a deal on loopnet, but I would count those chances as very slim, especially if you are in a competitive market.My best advice for you is:1.

In scenario 1 you may be double counting taxes and insurance. 

If you apply a filter and the record count goes really low or to zero, that filter is likely not available for you to use.

You typically need two years landlord experience before lenders will count the rental income. 

If the smaller 3-2 sold that fast, I suggest keeping the 4-3 count. 

I also sell & manage many more properties for members of bigger pockets.Take a look at my post count.

Some stuff, like interior floors and paint, don't counts towards the federal limits.Anyone else encounter this sort of situation?  

Should we just count on giving 35% of our calculated risk, hard-earned labor and challenges overcome to the gov't?  

If your stated appreciation rate is 7% for a reasonably long time and there is no expectation of that declining then you can count on $8,400 in appreciation whether you are a bad landlord or not!