It will make it harder to qualify for your next properties if you acquire too many of these negative properties as their losses are deducted from the personal income you can use to qualify. 

Allow them to inspect the property and perhaps have a 3rd party that is not related to either of you inspect & approve the work before the next draw is approved, this will limit their risk by limiting the amount of loss if a contractors screws up or runs off. 4.) 

Then, hire a cost segregation specialist to apply accelerated deprecation on the property which flows through one's personal income to minimize the loss in taxes.  

(the lease states no refund of rents)2. doesn't PPP and SBA loans cover this loss for them if they apply and receive it?

I'm currently torn if I should continue pursuing a tenant to fill the vacancy (~$2500/mo) or just take the loss and prep the house for sale.

The good news is that you can add back your paper loss of deprecation, and your cash  deductions of insurance, mortgage interest, property taxes, HOA dues and even one time extraordinary expense. 

They are increasing NOI so significantly that cap rate loss should be absorbable.  

Fire damage rendered it a total Loss.

However, the mistake I see a lot of investors make and one that I am trying to avoid is the mistake of confusing investing with gambling.

When using hard money, you are able to spread your capital across multiple deals, rather than putting all your cash into one deal and taking a loss.