Such lenders expect 30-40% down and 10-15% in reserves.I would suggest keeping that $10K in a conventional IRA separate from your new 401k so you will have control over it. 

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.  

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.   

We are going to use the money to purchase in another state.One thing to keep in mind is that I am not sure where you are in San Diego (we are in Tierrasanta) but the City is strongly considering rent control so option #2 may only work for a period of time. 

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

Still more than I made before as a full time bank teller and loved the flexibility and control. 

With last years flooding, the appraisal district may be aggressive on reassessing property values to increase revenues to pay for the "future" flood control projects since voters balked at the mayors initially proposed tax increase to pay for it.

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.

Residential is 5-6% cap or less in my area but also with a 3% vacancy rate and and usually rent control of some sort.

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