There was added sq footage on top of what use to be carports and a patio that wasnt permitted.

You are correct, income from note P&I and any other borrower payments are considered ordinary income.

Interest income is ordinary income taxed at the highest rate.

Real estate get preferential tax treatment (vs. ordinary income). 

I have $50,000.00 to invest and I found $70000.00 patio home. so I decided to buy with 20%down and get the traditional mortgage but quickly realized that I have to pay roughly $3500.00 load processing fee to get the either 15yr or 30yr loan. question #1 should I use HELOC(which processing fee is in 7 to 800ish) from my home to pay the rest 80% and try to pay off as fast as I can or just get the traditional loan and utilize the tax benefits?

@Justin Y.A solo401k will not work in relation to a buy and hold rental business.You need "ordinary income" for you to qualify to put away in a solo401k.rental income does not qualify.

Your ordinary income in this case is $50,000Example 2 (Separate)You purchase a property for $40,000 and pay your contractor business $20,000 for supplies and labor and sell it for $100,000.

If you are a real estate professional and more specifically, if the income generated from selling this property would be classified as ordinary income you would have a completely different treatment.

All your profit on the sale of the flip is taxable as ordinary business income subject to self-employment income taxes no matter what you do with the proceeds of the sale.   2. 

We're still trying to come up with a good economical way to do a backyard patio area on his craftsman.