Why would an investor put money into an instrument with some degree of risk that yields lower than what they could get "risk-free" (risk-free in theory anyway)?

The bank letter of credit is a powerful instrument when it comes to guaranteed payment.

A purchase agreement is a legal instrument. 

Agree with @Matthew Irish-Jones a HELOC is a great short term debt instrument and a really bad source for a down payment.

Term SheetInvestor Contribution $281,494Use of Funds Escrowed and disbursed directly to lienholders to ensure title clearanceProperty Valuation Floor 700,000.00Investor Equity Share 40% of net appreciation above valuation floor, payable at exitExit Trigger Sale, refinance, or 10-year maturity (whichever occurs first)Security Instrument Recorded HEA agreement, subordinate to primary mortgage ($306,020)Investor Position Subordinate to mortgage; senior to seller equityClosing Timeline 30–45 days from investor commitmentDue Diligence Access Full access to property disclosures, listing activity, and lien documentation.Strategic RationaleLast 12 months: ~8.68% appreciation—slightly above national averageLatest quarter: ~1.61%, which annualizes to 6.61%High Equity Potential: Estimated $281K in equity post-lien clearance.Market Momentum: Active listing with strong visibility and buyer interest.Risk Mitigation: Investor position secured by recorded agreement and valuation floor.Resulting in liens of $281,494 (investor) and $306,020 (Mortgage) is $587,514Yearly Breakdown:Year 1:Property Value: $700,000 × 1.06 = $742,000Net Appreciation: $742,000 - $700,000 = $42,000Investor's Share: $42,000 × 0.40 = $16,800Year 2:Property Value: $742,000 × 1.06 = $786,520Net Appreciation: $786,520 - $700,000 = $86,520Investor's Share: $86,520 × 0.40 = $34,608Year 3:Property Value: $786,520 × 1.06 = $833,711.20Net Appreciation: $833,711.20 - $700,000 = $133,711.20Investor's Share: $133,711.20 × 0.40 = $53,484.48Year 4:Property Value: $833,711.20 × 1.06 = $883,733.87Net Appreciation: $883,733.87 - $700,000 = $183,733.87Investor's Share: $183,733.87 × 0.40 = $73,493.55Year 5:Property Value: $883,733.87 × 1.06 = $936,757.90Net Appreciation: $936,757.90 - $700,000 = $236,757.90Investor's Share: $236,757.90 × 0.40 = $94,703.16Year 6:Property Value: $936,757.90 × 1.06 = $992,963.37Net Appreciation: $992,963.37 - $700,000 = $292,963.37Investor's Share: $292,963.37 × 0.40 = $117,185.35Year 7:Property Value: $992,963.37 × 1.06 = $1,052,541.18Net Appreciation: $1,052,541.18 - $700,000 = $352,541.18Investor's Share: $352,541.18 × 0.40 = $141,016.47Year 8:Property Value: $1,052,541.18 × 1.06 = $1,115,693.65Net Appreciation: $1,115,693.65 - $700,000 = $415,693.65Investor's Share: $415,693.65 × 0.40 = $166,277.46Year 9:Property Value: $1,115,693.65 × 1.06 = $1,182,635.27Net Appreciation: $1,182,635.27 - $700,000 = $482,635.27Investor's Share: $482,635.27 × 0.40 = $193,054.11Year 10:Property Value: $1,182,635.27 × 1.06 = $1,253,593.39Net Appreciation: $1,253,593.39 - $700,000 = $553,593.39Investor's Share: $553,593.39 × 0.40 = $221,437.36

That is a true test of RE versus 4 % in a debt instrument.  

Here's your specific guideline:Handbook 4000.1, Section II.A.1.b.i(B):“The Borrower must occupy the Property within 60 Days of signing the security instrument and intend to continue occupancy for at least one year.”This means:The borrower must move in within 60 days of closing.The borrower must intend to live there for at least one year.FHA does not require the borrower to remain in the property for a full year if circumstances change (e.g., job relocation, family needs), but the original intent must be genuine1.If the borrower moves out and rents the property after fulfilling the one-year intent, FHA does not restrict them from doing so.

The answer for us is this - if we really like the person and can be assured that the capital is "patient capital", meaning they are in for at least 12-months, then we'll go pretty low...into that $25K arena using a debt instrument.

We have one on our home and it has been instrumental in helping with our 1st flip.

Converting them into primary residences will really benefit you if you're going to hold forever.Another strategy our clients will pursue is sell those properties using 1031 exchanges and purchase passive instruments like NNN commercial properties or Delaware Statutory Trusts which will keep the depreciation recapture deferred.