I asked about short sales and they haven't/won't file for one of those, which I find odd, because due to my limited knowledge of estates, I don't believe the IRS can force beneficiaries to settle debts of the estate. 

This then causes the issue of not being able to refinance out of it, you are forced to sell.I've done the buy, rehab, rent, refinance and I realized this same issue recently when I was looking around at other financing options.  

I thought the self-dealing provisions of section 4941 are intended to apply to private foundations and disqualified individuals, not arms-length transactions between related entities. 

Sadly,  the government is an irrational force in the market so we can only guess how that will play out.

If I hate going to City X I'm not investing there and forcing myself to spend time and energy there in upcoming years.  

In my case, I hate owing money to people for too long, therefore, taking loans puts me in a position where I am a bit more forced to make it work for myself and investors, because in case of anything, I know they might be coming after the company.

I seriously doubt that this is the case in most out of state rental markets, unless perhaps you are looking in class A neighborhoods.Con: You can't as easily or practically as a newbie buy under market value and force appreciation.Con: You can't obtain favorable lending terms through house hacking.Con: You have to pay everyone to do everything for you, which not only cuts into your profits but also robs you of learning the business hands on.Con: Lots of cons ... con men and women telling you everything that you want to hear to sell you the dream and take your money.

If push comes to shove I will be welcomed back with open arms.

The reason: In business you need to keep 'arms-length' distance from any deals otherwise you'll could well run into unforeseen problems!

If I am right about that, I think that Option 1 would probably be forced on you and its still a good way of doing it. :)