Today's market in some states/cities has over demand and under supply so the cap rates compress (more people bidding for every deal pushes the prices higher).If interest rates go up eventually the cost of money will be too expensive to continue and over bid and there will be a lot less people bidding on properties thus, less demand which in turn will cause the prices to go down.In markets where the demand does not exceeds supply the impact will be much less noticeable.

Ours didn't cover sewer back up and that caused headaches even though we were cover for flood.

If something like a plumbing leak or roof leak happens, he might just ride it out while it causes major damage to your property.  

Being annexed into the city will cause a property tax increase, which should be factored when looking at NOI and Cap Rates. 

Cleaning/wetting the carpet that is sitting on the wood can cause the boards to ripple or if enough water penetrates, buckle.

One thing that might cause you problems is if you have a lender on the construction loan.

There needs to be just cause-i.e. refuses rent increase, doesn't pay rent , etc.  

You can not give 30 days notice without "Due Cause"-even with a month to month lease.

Just curious cause you stated that you had some decent built-in equity, which is hard to come by through buying at retail price with some of these turnkey companies.  

One thing to be aware of though is that rental income from the Fort Collins house will not show up until the following year's tax return, so that may cause issues in qualifying, depending on the lender.