I see what you're saying about the 2% rule. 

On top of that, FHA has very strict and particular rules around income.

Since you’re considering converting the upper unit into a short-term rental, you may also want to implement strict rules around smoking or strong odors in your house rules to avoid future issues.

The rules are pretty complicated and the only people who really know all the terms and rules thoroughly are the Rent Levelling Board.Caveating that I’m not an attorney so go seek your own advice but I clarified a few things at a recent rent levelling hearing (which are open to the public and you can find the schedules with a simple Google).

Also, here's a great article that describes the REPS status:https://www.aicpa-cima.com/resources/article/tax-rules-for-r...And another for the passive activity loss limitation that other mentioned:https://www.irs.gov/publications/p925

My general rule of thumb is that a property needs to do 15-20% of the purchase price in gross rental income.

NOI Underwriting Methodology: NRI and EGI, real estate taxes, operating expense underwriting rules of thumb, replacement reserves, appraiser’s impact on lender underwriting, expense comps, etc.10. 

You can still easily find the 1% rule and positive cash flow and there's amazing appreciation potential.

And, sounds like you're exactly at the 1% rule, which is golden!

If you're the only one in your company, this may not be necessary since you set the rules.