I hope it's not too late to invoke the partner aspect, it allows you to be a lot more demanding in terms of your due diligence, and it allows you to not be the bad guy if you have to turn them down ("I wish I could have helped you but my partner said no and we can't invest any of our money unless we both approve the investment").To your original question, IF you decided to make a loan like this, I would see three options:Unsecured personal loan (weakest/worst/don't do it option)Secured loan - they buy property and you are the lender secured by a mortgage on property (better)Rent-to-own - you buy property and they rent from you with an option to buy (questionable esp w/ family, may be tricky or illegal depending on how structured, etc. and see next point re: owner-occupied)However another aspect is that since this would be an owner-occupied property, there are a ton of consumer protection laws (Dodd-Frank) that apply.

Why not base the security deposit on the actual condition of the apartment?

If you start a LLC with both of you on it then you need to secure commercial financing.  

See ya later security deposit 

Once I had secured the land, I started finalizing the building plans and working with my GC on the construction costs.  

Hello Community,I am an investor/wholesaler based out of Las Vegas,NV.I recently picked up a property under contract in New Mexico "sub to"My plan is to secure an Owner Financing transaction were I can put a family in the property.

If you do get stuck with it and your tenants don't pay you back, you could withhold it from their security deposit (assuming you gave them a copy of the rules when they signed their lease and incorporated them into the lease).

If you get this house or not you will defiantly save the heartache in the future knowing you can secure a loan.  

I'm not an attorney, please seek the advice of an attorney about security/funding laws.

If you take a line of credit secured against another asset then you're essentially buying for cash.