This property is in Michigan, all banks in this area do 15 year mortgages around 5% interest rate for rental homes with traditional mortgages.

However, this will hinder her ability to come up with a traditional 20% dp and new mortgage payments.

So, I've getting my feet wet in understanding where funds can come from for deals when you yourself have very little liquidity. I went to my local bank and they informed me that they do standard 75% of property Value ...

My interest rate is about 4%, which is slightly higher than what you can get with a traditional loan but only by a half a percent or so, and the no PMI makes up for that.

@Joshua Curry It is unlikely that you'll be able to get them financed traditionally. 

Traditional FannieMae/FreddieMac programs are actually 15% down/20% down respectively, on a duplex that is your primary, and 20% down if it is an investment.

If he closes shop, he'll be facing judgements in court from these providers, etc.Business owner owns roughly 50% of his home valued at $300kBusiness owner's FICO score disqualifies him for more traditional / sensible financing which is why he opted for short term working capital in the first place.Proposed Solution:Come in and pay off the existing $40,000 owed to short term working capital providers on behalf of the business owners.Take deed to the property under a sub to arrangement.Lease option the property back to the business owner allowing him to stay in his home.Charge a reasonable fee for the $40,000 and lump that in with the monthly mortgage payment and spread the payments over 24 months.Expected Result ROSY Scenario:Business owner will free up cash flow.

I also see so many investors doing the rehab with cash/hard money and the refinance so the property appraised higher, so I just don't know if it's better to even think about rehabbing (by that i probably really mean updating) with a traditional renovation loan. 

If you're going to combine it with traditional financing, remember that lenders don't want you borrowing your down payment, so you will need to still put down 20% or so of the purchase price IN CASH, with "seasoned" funds that have been borrowed or gifted in the past 6 mos. 

You will need to mud and sand down the patch and repaint the area or even the entire ceiling if the color differences are significant (or get someone to do it). a Handyman may charge you about $100 to do it.