There are a lot of "side-hustles", legitimate and questionable, that work to insert themselves in the process to siphon some off some of the value between buyer and seller while creating either dubious value or no value at all.

Similar thoughts to what everyone above mentioned, it is doubtful any legitimate lender will take a junior lien position.

@Guy YoesIf the room in your house is your principal place of business (and it sounds like that is the case), then traveling to check on the rentals is a legitimate deduction.

Any advise on how to structure a legitimate deal if he continues to pay the note and I provide financing for the rehab?

@Travis BuckNot only the suggestion from @Yonah Weiss and @Paul Caputo is legitimate, it is the ONLY allowable method.

@Rick S.Unless there is a legitimate non-tax reason for your partner to pay the $20,000 closing costs.

Assuming you meet the necessary zoning, you will need it approved by the city to do it legitimately. 

We have a property management company in town and could help you through some different recourse steps:- Make sure to look through the management contract you signed to see what recourse actions have been put in there for this specific situation- Make sure to look at any invoices that were input into your owner statements/portal and see if these checks were made out to actual contractors or were made for legitimate expenses.

Even if you had an FHA loan originally (which it sounds like you don't), you could another FHA loan assuming you could show the old loan was paid off at closing (and there are other legitimate reasons you could have two FHA loans at the same time). 

Nor does it overrule legitimate safety requirements.