I was wondering if there are any potential tax deductions we could take as a passive investor. 

You can use the extra income to pay down debt, save for retirement, or invest in additional properties.Tax Benefits: There may be tax advantages to renting out a portion of your home, such as deductions for mortgage interest, property taxes, and depreciation.

You would then hold the loan on a 90-95% LTV product at 5% (Which is taxed at ordinary income).

It's why companies like ours exist - we are creatures of the tax code. 

I would love to keep the home for many reasons - potential appreciation, landlord experience, tax benefits. 

You really need to find an accountant that loves tax strategy. 

While there isn't necessarily a 12 month seasoning requirement to refinance in this instance, your loan amount will be limited to the original purchase price + closing costs/fees/points if you refinance before the 12 month seasoning period has passed.

We have built into the lease that if they ignore us and do not sign than the increase is automatically but into effect AND there is a $100 fee for each month that they do not sign.

Is it normal to pay down or fee before getting the $$?

Down payment would still be $60,000.Of course if buyer defaults on the loan I would still foreclose, and I would require home insurance/property tax in escrow like the banks do.Do you think this would work?