If you ever have to go to court on something like this you will be in the odd position of being both the landlord and the tenant, so I would leave nothing to chance or interpretation.Personally, I agree with Nathan - I'd have real questions about any potential tenants that were OK with this kind of arrangement. 

Just keep a few things in mind: First, make sure the mortgage lender’s cool with the arrangement, as some have rules around subleasing or leasing to an LLC.

I use ChatGPT to take my thoughts and arrange them in a way that sounds clear and polished since I’m not always the best with words.

Two months ago, I decided to cancel our arrangement with them.

To follow up on Evans point about option 1, I would advise not getting suckered into this arrangement as it handcuffs you when the economy is in a recession. 

Also adding, I have spoken to my parents and they are all in for being creative with our arrangement.

So, whatever you both decide works, make the agreement on that arrangement.

Preferred equity is often structured to resemble a loan in that it provides fixed payments and a return of capital, rather than a share of profits, which could reduce its exposure to UBIT.

At least at the court steps... not sure how that will work with online auctions via Xome or Auction.com.It sounds like I may need to capture this funding arrangement under a different instrument.

@Jesse LeBlanc, I still don't see what the point of any arrangement the seller/borrower and the lender had was.The only thing I can GUESS is that by overpaying the lender grossly, they will receive that residual money after January 1st and be able to book the profits in a different tax year.