I handle payments by draws and I must always be ahead and work versus payments.

I have 3 accounts per property which helps me leverage APY on savings accounts, prevent funds from being comingled, and easily set up auto payments for things like mortgage payments and utilities. 

Our instincts are to eventually rent it and use the income for payment assistance on a new home mortgage.

I'm speaking of co-living in a typical A or B level neighborhood house, so instead of a 20-25% down payment, we are speaking of a 1-5% down payment. 

Depending on how the water is getting in, there may be cheaper methods for sealing the basement walls from inside.Keep shopping until you find someone trustworthy with solutions.I would also consider going after the first contractor because they robbed you.

My method has always been to call every listing that hit 90 days on market in areas that I want to buy.

I'm a local real estate broker, investor, and manager (100+ rentals, mostly Airbnb/STR and multifamily).House hacking is a tried-and-true method and in Sacramento you can produce some meaningful income while enjoying the appreciation and tax benefits of owning real estate.

You could front the down payment as well as monthly payments to the seller, then charge interest on them.

You definitely want to use a thorough screening method like rentprep.com that gets their income, credit, background check, and call at least 3 references (make sure to verify them by address/job and then their name).  

The main issue I have is contemplating the baloon payment at the end of the 2nd year and refinancing the remainder with a bank...how can I compute that into calculating the IRR?