They had issues performing because they didn't underwrite expenses correctly and as a result they ended up carrying alot of debt and losses.

@Bill HamptonNot a cpaBut you should have a profit and loss statement that shows all your profits and losses.

Be sure you and your friend are receiving annual forms 1098 associated with both loans and that you discuss with your respective tax advisors.You will purchase hazard insurance in your name, listing the underlying lienholder as 1st loss payee and your friend as 2nd loss payee.When structuring a wrap, it's best for the wrap term to be longer than the term for the underlying loan and of course the monthly P&I payment to be higher. 

Where the parties to a venture join together capital or services with the intent of conducting a business or enterprise and of sharing the profits and losses from the venture, a partnership (or other business entity) is created.

Jeff,I would suggest another questions/request for info to add to your due-diligence:    "have there been any claims reported to you, submitted to the Insurance carrier, or that you are aware of, during the past 5 years"I would also suggest that you request that they get the "Loss Runs" (report of claims) for the past 5 years from the current owner. 

when she moves out, would it be best to, ask her to replace them with another pair of used machines that work or just take the loss.

In addition to the response above, any excess losses incurred can be used to offset other similar types of passive income. 

Losses, including carried forward from RE (tax form 8582) can be used to significantly offset roth conversions in early retirement if you keep income under the threshold. 

You will also need knowledge of the game and the areas you choose to lend in, not knowing your areas or having someone on your team who does could spell a loss.

And their roof loss settlement is "variable by roof age", not actual replacement cost, nor depreciation adjusted (most insurances will hold the depreciation portion of a claim till the repair is done and only then release the funds).Make sure you compare apples to apples when shopping around, pay attention to what they give you for "free", what deductibles apply and when exactly you can get coverage from the insurance and to what limits.