I have forgotten all my material on market segmentation :(@Nathan E., i guess that is part of my issue at the time.

At the very least you'd need to file the proper exemptions under Reg D. 

I did not budget properly for flooring and know it is not wise to pay 2-4$ per sf to refinish the hardwoods so they can be torn up in a couple of years so my options are a rebuff(screening) then coats of poly or laminate.

We chatted for about an hour on Wednesday and they seem genuine, but I haven't had time to vet them properly.

Tell him to buy you out like a proper business person or pound rocks!!

Either they really need it and will not give back down payments because they can't afford to, or they realize they've found a sucker and can't wait to cash in on your ignorance.I'd say chalk it up to a win, as you learned more about doing proper due diligence before signing the dotted line, and overall this lesson was extremely cheap compared to the price that others have paid when breaking into real estate.Best of luck in the future!

I’m unsure how to properly approach, so I usually say “I was looking at a property in the neighborhood to purchase… are you interested in selling” (Paraphrased).

@Will Johnston - You write off 100% of the interest on your Schedule E, regardless of what you do with the funds you got from the cash out refi.  

That said, @Richard Burke there are proper ways that rules (especially antiquated rules) can be changed.

Except for the unscrupulous wholesalers that try to re-market property already for sale at a higher price, proper deal sourcing and problem solving does take a ton of work!