Regarding taxes, I believe LLCs are pass-through entities, and you will just claim the income on your personal tax returns.

@Quiche LynnI think your confusing the term noteThe note is a promissory note - meaning the document that she signed stating she will pay this person this much money.What it sounds like is she wants to send a settlement offer to try and renegotiate the deal?

No "headaches" except for risk of near total loss of principle unless I put more money in...I'll take the risk of a project that I need to complete personally in exchange for a near-perfect risk/reward profile and complete understanding of the investment.

Statistically, 20% down dramatically reduces the risk of foreclosure.TERMS:Interest rates: Some people like to raise their interest rates higher than what a person can get at the bank. 

No personal income, tax returns or DTI to worry about.

I would personally feel better if they were at 4" though, particularly if there will be small kids as renters.

Keeping your building expenses separate from your personal finances can make it a lot easier. 

House hacking will also give you some personal "property management" experience.

Hard for a person to imagine living there. 

It sounds like you are placing into service as a rental a house that was previously a personal residence.Your basis is purchase price + improvements made to the house from purchase to the time it was converted into a rental.