In response to your question about a purchase with an initial cap of ~5% equating to a great long term investment - equity growth potential is certainly part of it, but I’d argue that the propensity for consistently increasing rental rates and the stability of the overall rental market are an even bigger piece of that puzzle.I can’t really give you a definitive opinion on your specific situation without knowing more about the current make-up of your portfolio or your goals for passive income.With that said,  there are absolutely  methods to reposition equity in high growth potential properties to more income-centric opportunities within our market. 

Obviously, the home could be sold as the old sq ft and the investor/buyer can just go and permit it for the increased sq ft,  but I would think that the county automatically will go and assess the home as soon as it changes hands since this the county has probably seen this before. 

That way your monthly mortgage (and the interest you are paying) doesn't increase but you access to the equity in your home (some banks are giving up to 95% LTV).

If you want to increase cash flow then we can talk about reducing debt.

The properties were bought with 100% leverage, so once the loan for the down payments are paid off in a few years, the cash flow will increase pretty dramatically. 

(There is uncertainty though how much Feds will increase interest rates next 6 months.) 

You could go to your insurance company and request they lower the replacement cost or increase your deductible... if they don't want to write a policy under those conditions, you can look for another company.

If I aim at 12%, even a rent increase would not offset the expenses enough to hit 12%.

I give a 30 day notice for rental increases.

Go ahead and make them nice - you can probably increase your rents somewhat when you do.