Can anyone clarify the best practice when you need both k8s and vms? Rancher helm chart on harvester's k8s? k3s with rancher in vms? Separate rancher for management on bare metal or vms? Just use harvester k8s?

If you want K8s on Harvester you either need to host in VMs yourself or use Rancher to create clusters hosted on Harvester (which spins up VMs from disk images). You should not use Harvester's underlying K8s (RKE2). As for where to run Rancher, it depends on your Harvester - if production then definitely separately in a cluster outside Harvester. If dev/test then you could run in a Docker container on a single VM within Harvester.

so rancher in VMS on harvester, then provision with harvester node driver to create other clusters outside the rancher mgmt cluster on harvester? So put harvester on all bare metal? Why are we not able to use the underlying k8s in harvester with other namespaces out of curiosity?

From Harvester 0.3.0 it's a bare-metal install. With 0.3.0 it was possible to install Rancher within the Harvester K8s but that was stopped with 1.0.0. Since I'm not SUSE/Rancher I can't give you official reason but my guess is ease of support and management - easier to update Rancher if it's not part of "OS"

I see. So 1.0.1 harvester on all bare metal. small 3 VM rancher such as k3s. Then other clusters from there in vms on top?

If this is production then I'd host Rancher on 3 separate machines (bare-metal or VMs hosted in something else - don't need to be "meaty"). Then you can use that Rancher to manage other clusters hosted in Harvester.