Be sure to enter a "lease-option agreement"rather than a "lease-purchase agreement".The former grants the option to buy at any time during the rental period,while the latter requires purchase by the end of the lease period and has legal ramifications for backing out.

If they don't meet other requirements, I'm not seeing that income is an issue, but if you're willing to overlook other issues, you need to change your requirements.Income should be and must be considered regardless of the source of funds for legal activities.The issue is that income must be reliable.

Dumping demo debris that is clean/legal is not that expensive.

Not your concern as far as the legal stuff, although I'd want to know what the issue is in case it could have some liability for you in the future (drugs, illegal home business).

The point is that this cannot be played...at least not legally.

Anyone can buy a note and legally enforce it.Certainly strange payment terms.

This is not legal advice, but one alternative is that the loan documents simply give him a limited power of attorney to sign the deed in lieu on your behalf if you default (rather than you signing and him holding deed in trust).

My advice is stop wasting your time trying to out smart the legal requirements, it can't be done if the law applies to a transaction.

If this is legal, how would you be able to protect yourself from this investor taking the house?

Costs of taxes, insurance, repairs, servicing, legal fees all add up pretty darn quick.