help please ~ 2 Questions. 2nd deal ~ Pittsburgh, PA

[Katie Landis]

Dear BP community,
This will be my second investment property. I have two main questions 1) financing; 2) whether to leave the home an unofficial Duplex (it has Licensed Neighborhood Commercial zoning) or convert to a true SFH. Brief background: My initial investment is a SFH buy and hold with a traditional loan and I paid for all of the improvements out of pocket. The property I'm getting under contract soon is a 3 story, walk-out basement, brick row home in Pittsburgh. Anticipating a major rehab, but not down-to-the studs. Purchase price should be $160,000-175,000.

This time:
1) Hard Money or Conventional 30 yr loan w/ 5 year ARM.

considerations | 1 year interest only loan for $260,000, $136,000 rehab holdback, 8.95% interest rate, $924.93 monthly payment, $65,305 approximate Cash to Close. OR 30 year Conventional loan 5 Year ARM, 20% non-owner occupied down payment, $990 monthly payment at 5.875%, $50,000 approximate Cash to Close.

pros of hard money - rehab budget provided by OPM
cons of hard money I'm unfamiliar with the product and would prefer a lower cash to close amount

2) "duplex" or SFH

considerations | I'd like to utilize the home as a Short to Mid-Term Rental. 

pros of leaving a duplex - it can be rented unit 1, unit 2, or both which provides some flexibility.

cons - of leaving it a duplex - I predict it would appraise for more as a SFH

Hopefully I've provided a decent, concise description of my situation and questions. Any help is appreciated. Thank you for reading!

[Anthony Angotti]

@Katie Landis when you say an unofficial duplex what exactly do you mean? Even if the zoning is correct, if it doesn't have an occupancy permit for the current use you will run into issues if you need anything in the future. 

Problem 1) You try to get permits. You flag yourself as an illegal use. You can't use it as a duplex anymore in the city without doing serious renovation or digging up a case for continuous use over the history of the building. 

Problem 2) Utilities aren't separated right. You end up having to pay them all until you renovate to split them up correctly. Which brings you to problem 1 again. 

Problem 3) Building burns down. It was an illegal use of the property which gives you an insurance nightmare. 

Problem 4) Someone dies because of something at the building which was an illegal use. I don't want to be in that situation because it's probably a law suit. 

I'd figure out this use case question before anything because IMO an illegal use building isn't worth the hassle. Especially not in the City of Pittsburgh jurisdiction. In the suburbs it's easier to work with the local government, but dealing with the city for anything is awful. 

I've accidentally talked myself into buying these illegal use buildings in the past (once) and it turns into a hassle really fast.