Should I add it as an addendum? 

The goal was to initially do a small renovation and add an additional room and bathroom to the already existing older home. 

I do wonder if I leads to more inventory though, I have for instance another client that this 2.5% might be the difference in deciding to list or not, for sellers without a lot of equity that 2.5% can be the difference between writing and check or not, which in addition to some people not having the money to cut a check is also a huge psychological barrier, there are probably even some people on the margins who have in thier head they will only sell if they can net 100k in profit or some random number like that.

If you want to protect your friend's capital as if it were your own, you'd want to:1) Secure the loan with real estate in the form of a deed of trust or mortgage (depending on the state the property is in)2) Obtain property insurance binder with your lender as an additional insured3) Obtain a lender's title insurance policy protecting them (different than an owner's policy) and transfer all funds through an escrow closer or real estate attorney (depending on the state, the requirements for closing may differ)4) Use a real estate attorney who also practices private lender law in the state the property is located in.

We are currently working on how we are going to budget for these additional replacements.

My recommendation is to hang out with Alchemy of Money for a CPA and Engineered Tax Services for additional tax strategy. 

I don’t know where you’re doing business and I’m not an attorney so in addition to actually going to the HUD office you should seek legal counsel.

I have a very investor-friendly contractor (who offers pay-at-close in addition to conventional), and good clients who would be open to unconventional sales.

@Vikranth Biradar Here's an article with additional FAQs on cost segregation studies that you may find helpful.

If you have any additional questions or concerns, please don't hesitate to reach out to us."