Then, when someone goes to get financing for the asset, the house appraises low, and since the lender is forced to lend off the lower of the appraised value and purchase price, their loan amount must drop and the down payment increases. 

If you want to value add you are better off with a structurally sound unit that is priced low and you can rebuild from the ground up front loading the risk.  

My initial thought was to put enough in savings for a 1 year emergency fund (am I pharmacist so I am risk averse!)

I have the funds to support both.

When they money is gone, we have a hard money lender that works exclusively with owner builders lined up to fund the remainder of the project. 

All that said, depending on how low your adjusted tax basis is, having a taxable sale would be extremely costly. 

A few more passive, but riskier, ways to offset w2 income are oil and gas investing and ATM investing which have funds. 

But the value that can be added in high value markets is greater than in low cost markets.My last value add (purchased Dec 2021) was purchased off market at $2.25M and was appraised at purchase at $2.5M for the loan (so on purchase I "made" $250K). 

Rent out your units at, or slightly below, the market rate and gradually increase rents YOY (2-2.5%).This strategy will allow you to get your foot in the door with a low down payment AND less competition.

I have a 4,200 Sq ft multifamily off market deal I'm trying to offload in Cullman AL for a low price just because I'm going through a divorce and needing to get rid of stuff.