Corinne, I never had coconut or any other oil "ruin" a purely cloth diaper...synthetics, yes, you can't ever seem to get all the oils out and they start repelling water, but pure cotton, it may take effort, but it can be stripped out if necessary. The oils may harm your diaper covers though, if you use PUL-lined ones.
But a cautionary note about coconut oil: there are a lot more food allergies and sensitivities these days than there ever used to be, and using coconut oil on his skin was how I first knew for sure that my 2nd son (still a nursing baby at the time) was allergic to coconut: I used it to loosen cradle cap on his scalp in lieu of the "baby oil" they used to recommend, and it worked great on the cradle cap, but then he broke out. I had suspected coconut oil because I used it in cooking, but hadn't isolated it sufficiently yet as a variable, to be absolutely sure.
Anyone allergic to nuts, can be alleric to coconut, as it is, in fact, a tree nut. A large one, but a tree nut nonetheless.
My daughter, never allergic to it all these years before, is now reactive to coconut, and that started at going on 10 years old. But oddly enough she can still have almonds. But I don't dare use the "natural" sunscreens on her (or my boys) because they all contain coconut oil or something else my kids are allergic to.
The best thing for diaper rash I have seen, that doesn't harm any cloth or synthetic diapers, that is amazingly effective at keeping skin dry and breathable to heal rashes of all sorts including diaper rash and my own heat rash, is the Disana pure raw silk diaper liners, made in Germany, specifically for the purpose of healing diaper rash. They are about $21 for a 3-pack through Green Mountain Diapers, and I gave them a try, and would recommend them as an alternative to creams, oils, lotions, powders, and goop of all kinds. I even tried French Green Clay for my heat rash, and it didn't work the way these did.
So there is a way to heal and soothe bottom rashes without creams or oils or lanolin or any of that, at least. They do require hand washing and air drying, but I haven't found it any hassle at all compared to smearing on goop and then worrying about it harming diapers or making my laundry difficult. Hope that helps!