As for bad tenants, if they pay the rent you just deal with it and see if there's a way to get them out.If they don't pay rent, you go through with the eviction process and just deal with all the hurdles of the LTB.If you can hold the property for 6-12 months without any rent and have a bit of cash set away for incidentals, legal, intentional damage etc... it will never be too big of a deal.

A license will make it legal for you to buy/sell/lease property on behalf of other people for a commission.

Interest Rate: 9.99% fixed interest rate Collateral: A first priority lien on Borrower’s fee simple interest in the Property and the improvements thereon together with any personal property owned by Borrowers related to Property Prepayment Penalty: none Loan Fees: The following fees shall be due: (1) 3.00 points, plus customary underwriting, processing, legal, administrative and site inspection fees to (**) at closing of the loan; (2) $50 application fee due upon signing of the term sheet.

What would be the legal course of action?

I'm not familiar with the legality of your proposed idea.

I would evaluate the scores and see if there are simple ways to improve them before going through a ton of effort to try and find a loophole that would leave your partner with minimal legal recourse if things were to go south.

The rental is our old primary with FHA MIP still on it, though we're about $3,346.07 away from paying down to 78% of the original purchase price when my loan servicing company will have to legally remove $123/mo MIP payment. 

The goal is to raise capital from 2-3 parties to invest in a single property and distribute profits over 3-7 years.

We feel confident that once we apply our own screening criteria, we could find decent section 8 tenants, however, I am questioning, as a safe guard, if it's legal to give a tenant a notice of terminating a lease if the tenant has caused enough damage or incurred enough fees to deplete their security deposit.For a prior experience example, our last Section 8 tenant (the "final straw" tenant) had a $650 security deposit and at one point, had the front door kicked in, breaking  the door, both locks, and breaking the surrounding plaster (not due to a home invasion).

@Peter Bui You can open escrow through a third party or pay in full, many ways to structure it.