You could even (potentially) show it with the existing tenant in place, if you give the tenant sufficient notice (check local laws) and you trust the place isn't a pig-sty.Good luck.

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.

@Jason CarterThe only thing I will add is that the laws governing business entities are very state specific.

First, I would say that unless you reported the pot to the police, and then they advised how to destroy or they confiscate I would image your lease drug paragraph would have no legal merit in a court of law and or may be cause to find you guilty of a crime had you not notified the police.Second, as many others have said, you should base the deposit return on the condition of the apartment unit.Third, just because you can, doesn't mean you should.I liken the security deposit return to that of a 'personal guarantee'.

They don't make or interpret law.  

Learn your local laws now!

Biggerpockets admin removed the other link to the Montgomery County Foreclosure sale, so I won't add the website address but here is the name of the law firm that produces the monthly list: Linebarger Goggan Blair & Sampson, LLP

Laws vary from state to state - and a good PM should be able to advise you - but it sounds like maybe they didn't follow standard, legal protocol on this one. 

Whether the occupants are named on the lease or not, if they establish residency, they are our tenants and are protected by landlord-tenant law.

The seller agreed to pay 3% but our mortgage guy says only 2% can be paid by law.