Payments that you make normally fall into one of 3 buckets100% of the payment can be factored in somewhere on the returnPartial payment can be factored somewhere on the return0% of the payment can be factored in somewhere on the returnHouse-hacking also has considerable tax implications in the event that you want to sell this property.You can potentially defer a portion or all of the gain on the investment property with 1031 exclusion.You can potentially exclude a portion or all of the gain on the personal residence with section 121 exclusion

It depends on a few factors IMO in which route you take.

I think with all of them, the biggest factor is making sure expectations are set correctly and that your FIL is able and willing to lose his entire investment is things go wrong.  

Getting over the fear factor was the first step.

I'll factor that into my analysis going forward!

I also noticed you didn't factor in any utilities like water (normally owner paid), gas or electric.

There are a lot of factors like personal choices and goals that would play a role in which entity you might want to go with.

You can get into 4-plex territory in landlord friendly markets for what you are planning on spending on a TH4) I notice that one of your concerns is 'enough time to manage'... have you factored PM expenses into your calcs in case you want to pass management off?

They will be a major determining factor in the success or failure of your investment.

This self-torture is not recommended.To make it more complicated still, other factors may come into play such as prior suspended losses from this property or other investments or maybe (albeit not very likely) the net investment income tax surcharge.