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. 

I like the wax less rings now instead of the traditional wax rings.

"If you ask any entrepreneur, none will dedicate their success to traditional education." - Just a quote I read somewhere, and it makes sense.

@Doron RiceThere are lots of ways to get started, one of which might work for you is to purchase with a hard or private money loan, using the gifted down payment money, then after operating the property for a year go back for a traditional refinance. 

We see a number of advantages to this model vs. the traditional turnkey or direct purchase models, including but not limited to: Diversification / reduced volatility – by owning a fraction of hundreds of properties rather than 100% of a few propertiesBetter alignment of incentives with those managing the business – I don’t doubt that everyone has the best intentions, but in a direct ownership / turnkey model the investor makes money over time when no one on the ground is nearly as incentivized as the investor is to make the properties perform, whereas the investor typically pays the bulk of his fees upfront.

I think all other traditional loans charge PMI if you have less than 20% equity.

@Christian BorsI would go with what @Chris K.has suggested 

I think you will find that if your bank is placing the mortgage in the traditional markets, you will be forced to conform with Fannie Mae/Freddie Mac guidelines.