There's also a ton of investors who approach banks and believe they can borrow money without recourse (no personal guarantee) merely because the property is titled to an LLC and then falsely claim "banks do not lend to LLC's".

I also have substantial equity in my personal residence, but just something about borrowing from my life home makes me uncomfortable.  

I can't tell you how many times when people would contact my agents fresh out of guru school.. and talk a BIG game  we are going to buy 20 30 properties we are building a team blah blah blah.. when in fact most of them borrowed the money for the course and are now trying to do business with smoke and mirrors.. real investors that have money if you lay this out the right way will probably go for it.. and SELLERS I can see that for sure.. but then again in the retail resi space so many people just are clueless and or really have very little liquidity that even sending you 1000 bucks up front could be a risk and stretch for them..

The original note was for 220k, since the borrowers (previous owners) never paid, it's already at 500k because of interest and fees.

I was talking to an investor who told me if he bought my property, he would borrow money from a hard money lender for a few months and then refinance with a regular lender. 

I stole/borrowed it out of one of Robert Kiyosaki books :)

I have decided that I would rather borrow from myself and pay myself back interest vs. the bank.

FHA requires the borrower/buyer to be owner occupying the building, but state law requires that all lease transfer to the new owner and cannot be terminated solely due to ownership change. 

The borrowers are willing to put up the property along with the home as collateral.

I would if you have a lot of time on your hands now its a good idea to go back and get a w2 gig for active income to help you borrow money using conventional mortgages as opposed to using more expensive money like hard money or DSCR loans.