Does unit 1's leasable area or use of the space include any part of where you will be building? 

Nothing held back for maintenance because the houses they recommend buying are all newly rehabbed, and nothing held back for capital expenses because you should sell them in less than five years and move into multifamily investments so nothing major should break before then. 

Here is another way of breaking down why house hacking is a great investment even if it doesn't cashflow. 

In the markets I shop, there are plenty of properties that will cost around the 80k mark total (including rehab).

If you are looking to buy a primary your kind of stuck but if you focus on a MF 2-4 unit that makes it easier.There are some places in CA that can be used as an STR and not break the bank.

Cleaning and preparing to paint may also include Primer coat first especially in Bathrooms or Kitchens. number 2 is good always match the doors and hardware. number 4.

I have analyzed dozen including some provided by BP members and have yet to find one.  

It's sadly an extremely common tactic to offset flooring costs. 7-year costs, blacklight, no pro-rating, gimme a break.

Other options include owner financing and working with partners. 

The home is small and appears to be in great shape, not looking to break the bank for the inspection.