With the numbers you provided above, you will have to ensure you have healthy reserves.

At some point your business partner will want his cut (Federal Gov).

The reason it is harder to get a mortgage on a primary home vs investment property is a federal law called "ability to repay" or ATR. 

Do you have reserves you can show them?   

Proper will provide much more comprehensive coverage beyond just the reservation.

Probably around 14% interest for six months and you will need cash reserves which perhaps you have if you are thinking about buying with cash.Are you going to buy a home to live in or only to rent out? 

If you need a new job once you move, you will need an offer letter prior to closing on your new home (and you will need 6 months reserves in order to be able to use the offer letter as income). 

This^^^^^Unless he is loaded with cash reserves and can take a loan out based on his liquid reserves.

According to our understanding:1) California does not recognize REP status, but we could claim it on our federal taxes, is this correct ?

It is debt you are obligating yourself to and lenders and the federal government think of it that way.Missing a payment doesn't mess up your credit, but it does mess up your day when you get sued or prosecuted.