To give you cash back to re-invest in something else and earn a second return while the deal is still at work producing the first return.If the sponsor doesn't refinance, because there's nothing in it for them, you don't get as high of a return (IRR and CoC--indeed your multiple is less but you can make that up on the investment where that returned cash is placed). 

He is a high producing agent in the area, and a great potential mentor to help me get started as an agent (his personal offer).

Any arrangement that creates transactions between or produces direct or indirect benefit between a plan and a disqualified person results in severe tax penalties.The goals you are stating are contrary to this set of rules as outlined in IRC Section 4975.Your self-directed IRA is a means for you to have more control over your tax-sheltered retirement savings. 

If you want to build long term passive income through cashflow, maybe you keep it (because its hard to find cashflow rentals in WA right now), maybe you sell it (because those proceeds could produce a higher cash on cash return elsewhere).

If he knows the house is worth 170, is willing to part with it for 160, but you offer him 200 with favorable terms that still produce cashflow, he may see it as a win win solution 

Plus, they are generally more affordable than the market-rate housing produced by developers.

Both of these scenarios can produce an above average cap rate and may look good on paper but could be a costly mistake.  

Well we sold the houses we had and bought many more profit producing rentals elsewhere.

But I typically don't even do that because tenants that renew tend to be good renters that produce little risk, so there's less need of a large deposit.

As most rental real estate produces a tax loss, most taxpayers do not receive a benefit for these expenses, which are suspended under 280A and carried forward until you either have taxable income from the property to absorb them or you dispose of the property and lose them.