Alternatively, there are high-yield online savings accounts like Marcus or others - the difference is that banks have some inherent risk, thus the FDIC insurance. 

(after I deduct all the labor/material costs).

I'm just hoping someone with actual knowledge of it can provide some information that offers an alternate explanation.

Take advantage of the lower downpayment programs early on and once you are tapped out of conventional loans, I would consider alternative financing. 

For the material participation test, the easiest way to get it is Via the 100 hours and worked more than anyone else.

If DTI is a problem for a new investment property loan but you have everything else (credit, downpayment, etc), then DSCR loans are probably an excellent alternative.

Alternatives to ConsiderIf you want to involve an entity for liability protection or other reasons, here are some potential approaches:Assume in Personal Name and Transfer to Entity:Assume the loan in your personal name and later transfer the property title to an entity.Important: Transferring title may violate the loan’s due-on-sale clause unless explicitly allowed by the lender.

The main one being material participation. 

1.Activities That CountTo meet the material participation criteria, you must log your hours in a detailed and ongoing logbook throughout the year.

This would help us benchmark and explore simpler alternatives while understanding how complex the structure mentioned above truly is.I assume they are not actively managing their business?