How much cushion to build in is probably a personal preference you'll have to determine balancing your risk tolerance, worst case scenario management, the liquidity you have available to you that you've built into your model, and alternative contingency plans.Here are some ideas on how to structure your reserves and emergency tiers:Tier 1 - savings, checking, and personal property reservesTier 2 - capital expense reserves for rental propertiesTier 3 - lines of credit available via HELOC's, SBA 7(a)'s, personal lines, asset based LOC'sTier 4 - cash value life is a good alternative if you know how to utilize these policiesNot to be used in this exact order but each situation can vary.

Here's an alternative then: I could just keep this as a rental and sell it 1 year from now for $220K.In a rent to own situation, their option to buy is useless until they exercise it.

I can compare GM stock to Ford or a Utility bond to a municipal bond, I can view risk that has been standardized to look at alternative investments.

Alternately, your lender would fund your purchase as a first mortgage and the rehab costs as a second mortgage.

I suggest you get advice quickly from a qualified CPA or attorney who is familiar with IRS regulations regarding alternative assets in a Self-Directed IRA and thoroughly review your current and past transactions.Even your first investment, as you describe it, has some possible prohibited issues.

The GC isn't just pulling permits, they're actually responsible for the project.Another alternative is to get a license. 

I would also check with credit unions, they sometimes can help you when banks can't and sometimes they have alternative loan programs that can help you get into a place.

So its great to get an alternative viewpoint. 

An alternative would be to replace the windows in those units with predominate north and eastern exposures first and the others at a later time after you have replenished your reserves.

I hope it all comes to a resolution you can both be at peace with, since the alternative like @Michael Nemeth mentioned can be never ending war.