Pay off principal?

Assuming they never paid on Principal you could collect $261.24 a month when you finance the property your self for a total $37, 618.11 in collected payments.What is my Motivation to Sell?

I have about 20,000 to put down as a down payment so the monthly mortgage included taxes, pmi, and principal will be right around 1000.

If the interest you're paying your father or someone else, combined with the interest on the mortgage, combined with the principal paydown, the rent received, the expenses... if everything results in cash flow that meets your goals, then it will all come down to mustering the faith to take that next step.I would highly recommend connecting with someone locally who has house hacked... pick their brain, learn how they made it work, etc. 

The best option I could think of for her would be a 203K FHA loan, but I'm worried that the combined costs of the principal, interest, taxes, property insurance, mortgage insurance, plus the repair costs and even potential HOA/Condo fees would be a lot more than she could handle.

In the mid west it seems to be 15-20 year amortization periods (calc for principal and interest) while on the west coast I typically get 25-30 year amortizations. in the Mid west rates tend to be 5.50% - 6.25% for portfolio money while on the west coast you can get it for 4.50 - 5.25%.

For tax purposes I made my principal residence 50% and rental investment 50%.

Reinvest the principal pay down and all profits in a income fund.

Earnings accumulated on compounding of principal money and tax-free earnings will greatly (and mind-blowingly) outperform earnings on compounding of principal alone.

Also, depending on how the value of the property increased by adding that third unit, plus natural appreciation and paying down on the principal, you could look at refinancing out of the FHA loan to get rid of PMI.