They would reimburse me for real estate taxes and property insurance with caps of $.74 per sq ft and $.25 per sq ft respectively.

I was able to locate the code from 2015 that does talk about specs of a rain cap: http://www.seattle.gov/documen...

Unless there was a complete reno, I would raise the cap ex and maint expenses.

After doing quick math you are capping your purchase price at around $580,000 for an SFR.  

Underwriting my deals more conservatively, stress testing the deal (increasing cap rate by 1-2 points, making sure the deal still pencils out at 65% economic occupancy, etc.), having ample reserves (6 months-1 year), etc.

You will also pay more than cap gain tax on your depreciation recapture.Also, your down payment is not that 70k.

As mentioned, on a short-term real estate transaction, which a flip is, you will be paying marginal income rate not Cap gains.

If the latter has higher appreciation rates (or depreciation in a bad market) does the fact that the appriciation is capped (though it may still seem good if you bought the property for 80% LTV and sold it rent to own at 105% or more) present a problem in your eyes?

I would add in more allowance for vacancy and set aside some cap ex funds, but I don't know your market.

Cons: Payment shock at the end of 7 years, depending on the caps, your rate could fluctuate 1-2% when it adjusts.