On the acquisition side it's a tough to sell property due to restricted commercial financing choices (maybe only HM).

@Roland Rasos your numbers are pretty close, though you didn't include the acquisition costs, that might add up to 1-3%, so the purchase price should be closer to 55-57K for a 15% return.Are your rehab estimates believable?

Looking forward to hearing more success from your future acquisitions. 

Is it still profitable to pursue REO's or should I start to look into other strategies for acquisition?

But, dealers get to deduct mileage and other expenses, can use Section 179 to write off 100% of the cost of full bed trucks in the year of acquisition and up to $25,000 of the cost of other vehicles, can use Section 179 to write off the cost of computers and other business equipment entirely in the year purchased, and generally can take a lot of business expense deductions.

Developing now then selling does not change the character of the deal, the transaction is still a flip and your profit is still ordinary business income.When you fill out Schedule C (1040) for your flip, the IRS will not let you recognize the flip acquisition until the year of sale.

As @Rick Pozos  mentioned, lenders (myself included) will lend to first-time flippers and provide financing for 90% of the property's acquisition price (in my case, for distressed transactions i.e. if it's a bank REO property, short sale, estate auction, etc.) requiring you to come to closing with 10% down plus closing costs.

We are all W2 employees with solid credit and incomes however this first acquisition will drain most of the cash we have.

Without changing the price, higher borrowing costs would produce a lower leveraged IRR so a lower acquisition price is needed to achieve the same leveraged IRR that you had with the lower rates.

The Lending Products that they have are: Permanent, Bridge, Working Capital, Predevelopment, Acquisition, Construction, and Mini-Permanent.