Is principal reduction on the table as @Mike Hartzog suggested he does with his notes?

The mortgage company would prefer that the seller did a conventional sale, even if the seller only gets 500K even after commissions the mortgage company gets 100% of their principal back.  

He's in Arizona and just wants it sold.He knows it needs work (by my estimate about $20,000 worth) and the remaining principal is only $40,000.

It looks like the 'interest-only amount at the lower rate is lower than 30-year amortized amount at the higher rate, so I'd have more extra to throw at the principal before refinancing. 

Here's the numbers i used....Purchase Price: $46KDown Payment: $0Mortgage Rate: 5%Closing Costs: $2300 (assuming 5% of purchase price)Rent Income: $10,800 / year ($900 / month  which is $450 x 2 units)Gross Income: $10,800 - $1080(10% vacancy) = $9720Expenses: $1453(Taxes) + $550(Insurance) + $1080(10% Maint) + $1080(10% CAPEX) + $1080(10% PM) = $5243CAPEX is Capital Expenditure - big ticket items like the roof, a new furnance, new A/C, etc...NOI (Net Operating Income): $10,800 - $5243 = $4477Net Income = $4477 - $2963(mortgage principal & interest only) = $1514ROI: ~95% (includes equity earned)Cash-on-Cash Return: ~66%From a pure cashflow perspective, it's probably not worth it since i'm calculating your total profit for the first year of ~$1500.

For 3- and 4- unit owner-occupied properties purchased through FHA, you need to have 3-6 months of reserves at closing (reserves = principal, interest, taxes & insurance).

If you are representing yourself as a principal and you're trying to purchase from another principal (wholesaling) there is no requirement to put your BRE number or that you're an agent on your marketing.However, you need to disclose to the buyer that you are an agent at some point.

A basic principal in dealing with contractors is to not pay for work until it is complete.

The investors get a monthly interest check or interest and principal.

These are better questions for your principal broker as you want to make sure you are compliant to your state.