My understanding is also that loan proceeds are not taxed and therefore since we have only $11k in debt and almost $200k in equity we could afford to get a LOC or other low cost loan to finance the improvements and have a non taxable event with the little bit of interest being tax deductible. 

As you know, here in WA cash flow is hard to come by and not at affordable prices.Sharon

Long story short, if it's a money pit that you can't afford maybe it's time to see what it will bring on the open market. 

Need an affordable contractor to do paint and flooring for a small apartment in Pawtucket, RI.

With $100K to work with, you can buy 3 properties in an affordable market like Indianapolis and Kansas City which are both strong cash flow markets.

New flooring, cabinets, tops, appliances, furniture & finishes, added washer dryer, new utility service, tile drain, paver sidewalk, and more!

@Nick Paynter the Lansing market is still affordable and provides good returns.

I would aim for smaller homes still at 3/2 in areas that are a bit more affordable to enter.

As far as your cost of living going up, if you are able to afford it and make it make sense, then I’d say your are probably in a good spot.

From my experience and networking... generally your south east and mid west states posses affordable housing (150-200k) that cash flow.