but hey, that being said approach the homeowner and tell him you want to buy his home.. nothing wrong with asking!

Nothing wrong with that strategy it’s a great strategy but it’s not a brrrr.

None are right and none are wrong- they are all different models which may or may not work in a given town at a given point of time. 

I could be wrong though.

However, that interest would be coming to me personally, which would have to be claimed, so it would end up on my 1040 anyway.Is that right, wrong, or is there some other reason doing the loan would be better?

When It closes I would like to pull some equity out of it and put it into a safe index fund to back the property incase all goes wrong.

Remember, there really is no “wrong path” here, it’s just what you want to do and the goals you have. 

I don’t think you will go too badly wrong whichever route you take and I’d encourage you to think about how your strategy works for you as it grows. 

maybe I’m wrong. 

Using bad metrics can make the wrong impression, in the case of this thread it may convince newer investors that LP participation is the best way to be successful.