And if everything goes as planned, is there anything holding me back from refinancing once all the renovations are completed?  

The seller is telling me "it's only negative cashflow for a year and then you get it refinanced" but I am really skeptical to move forward on something that will drain all of my reserves for down payment and the $4500 rehab and then have negative cash flow for a while.  

That said, if you do want to refinance out, there are lenders and banks who specialize in refinancing USDA loans, into other USDA loans.

We don't have a pile of cash to put into down payments, so we create the equity by buying run-down properties, fixing them up (with contractors), turning them over to a property manager and then refinancing our cash back out.

@Joseph Morris, I'm not a lending expert but my husband and I have done our fair share of conventional financing and refinancing for properties.

@Josh Setterbo, the fed does not set mortgage interest rates, but interest rate pricing does fluctuate day to day.The difference between those two options is about $2400, which is 75 basis points for a ~$322k loan amount (hope you don't mind that I backed into it from your P&I payment). 75 basis points for 1/8 to rate is a bit pricey of a buy-down; the price ranges from 25 basis points on the low end to 80 on the high end. 109 month break-even, meaning the higher interest rate is actually better unless you are certain that you will own the place for at least 9 years without refinancing (for example if you are going to refinance to drop PMI in <9 years).So that's my little picture advice. 

After this, I would continue to build equity, and then roll one, or both, into a 1031 exchange, refinancing for the new property, and ultimately pay off the loans/heloc with the newly acquired property loan.

There may be seasoning periods with the banks that will prevent you from refinancing, so you need to make sure that the rents can support the higher interest rate if you're taking out high interest loans.

Some examples of good debt may include; refinanced student loans, a low interest credit card you pay off immediately and frequently, etc. 

I am thinking of going with a turnkey route and paying off my first investment with a heloc then refinancing to 30 yr fix and doing it all over again.