They are being "sold" on real estate providing so much tax benefit that it includes deduction against their regular income...

You're providing a home, not just a house.

Additionally I would have countered trying to make my offer more attractive other ways - i.) waive financing contingency, ii.) show poof of funds, iii.) increase earnest money, iv.) offer to pay any short in appraisal up to a certain amount (say 1% of offer price), v.) provide a low-ball offer but with an escalation clause (you'll automatically pay X amount higher than highest bidder), vii.) say you'll pay for home as is without expecting them to fix home. 

I really appreciate any help you can provide.

I do not know if any of the closing costs or construction expenses make their way to the working partner (e.g., if they're the selling agent or own the construction company, etc.)If all estimates go to plan, then the 55% net profit should provide an 18% annualized ROI for the $1M, but likely lower.

My goal is to build a portfolio that provides as much income as possible within the next 5 years, so I am thinking STR. 

I realize I may be asking for a miracle here, but I hoped perhaps some of you great professionals could provide some wisdom.  

The only challenge I see with your request with that we have to offer is that you're looking for a hybrid equity/debt partner (like mezzanine financing) where lenders like us only provide debt financing.

You do have somewhat of a positive track record; if it can be verified you should be able to find “partners” willing to provide the capital.  

Wise investors are putting systems in place (including property managers and other service providers) so that these risks are mitigated without investor being involved.