Not worth my time and piece of mind.

That risk, in retrospect, is not worth the potential return.   

My terms are identical to yours as far as the 1-year lease with 3 options to renew (for them), 3% yearly rent increase, etc.

I focus heavily on the sell side and on the buy side only work with high net worth individuals so the newbie wanting a 400k multifamily with an FHA loan probably isn't for me. 

Live in the multi-family for a year, then move back into your own home and rent out the unit.If if not ideal, it's worth the hassle. 

Even a small increase could make a difference in cash flow.

Rents have increased significantly over the past few years.  

If approved, you’d already be in a position to add units, whereas others might still be navigating the zoning process.That said, rezoning takes time and isn’t guaranteed, so it’s worth weighing the cost, process, and likelihood of approval.

This is not a perfect world, therefore increasing your debt increases your risk.

As you purchase more, your net worth will go up more quickly than the savings in interest with the other option.