The settlement is roughly 50% for loss in the property's value, 30% for a temporary easement (I've been told this could be considered rental income for tax purposes), and 20% in damages.This is far from tax advice but I want to share what I've learned so far. 

With the limited info that you provided, I personally would keep it in my portfolio as long as the unit is cash flow positive and the outlook for the location and overall rental market is positive.  

If you have carry forward disallowed passive losses those would be subtracted, too. 

We've mostly used 20% - 25% down payments on 30-year fixed to lock in low rates for 30 years, but this limits our purchase power.   

Additionally, the limit for VA loans in much of the country is less than $500k (like $437.5 or something).

Just in Oregon Wells Fargo loss mitt department in 05 ish had less than 15 people in it by 2010 over 400...

I had been concerned that they would hike the tax base to offset presumed tax base losses elsewhere in the county, but that didn't happen. 

If their maximum bid instruction is acceptable to us, we tell the lawyer, as a courtesy, if we plan to bid higher than their bid instructions, and we immediately bid a dollar higher than their minimal bid limit when the sale comes up and the lawyer representing the foreclosure entity bids the minimum amount to start the sale.As another courtesy, I also talk to other regular investors at the sale whom I have done business with or whom I have another business relationship.

From what I have learned so far, with my limited experience, you are accounting for a potential protracted vacancy, and should consider allocating some capital to update units when they turn over.  

You can house hack sure, however, your options are limited by that type of loan.