It does not effect cash flow, except you would be able to shield that cash flow from the IRS.Mark

Okay, as Curtis mentioned, there are exceptions for "on-site" property managers who are employed by an owner and who do not conduct those services he mentioned for any other property owner. 

Offices pretty much except for a few business models you can use space anywhere.   

There is an exception for lease-options for 180 days or less under Sec. 5.062(c) – otherwise, the residential sales contract promulgated by TREC would violate this provision when combined with a temporary lease.

He wants to partner with us - him being the financial partner and us being the managing/landlord partner, owning a rental unit together.This sounds like a good idea except the worry of the potential for family problems that can happen when money comes in the picture which I would hope wouldn't be an issue.

Ineligible Transactions The following transaction types are not eligible as cash-out refinances: The subject property was purchased by the borrower within the six months preceding the application for new financing except if delayed financing guidelines are met.

Though exceptions can be found or developed, I would suggest assuming that risk and return are commensurate. 

I agree with Jeff, except it seems, according to your example, that your outstanding mortgage would only be $80,000 (since you put $20k down.).

Ineligible Transactions The following transaction types are not eligible as cash-out refinances: The subject property was purchased by the borrower within the six months preceding the application for new financing except if delayed financing guidelines are met.

Are they any ways to get exceptions to this rule?