Expensive Duplex new build using FHA - Window of opportunity or run away?

[Evan Heckert]

Wanted to get a sanity check here before we get too much momentum. We were going to wait for the market to chill out and save for downpayment, but this opportunity came up and we're inclined to seize it.

We've always rented, but at 37 with a growing family, I'd like to start building equity and eventually cashflow. Here's the prospect:

0.34 acre lot in eastern Iowa, zoned for R3 Medium Density 2-Family, 2 min from interstate, $85k

Builder is proposing ranch-style duplex, with each side having 5 bed 3 bath, 1400-1500sq ft main floor, oversized 2-car attached garage. Est. build cost of ~500-520k. All in we'd certainly be maxing out the FHA limit for duplexes at $604,400.

Builder suggested market value should be $660k when done, and rent should easily be $2300/mo for each side (though we'd live in half for at least 2 years to avoid capital gains tax). 

To finance, looking at the FHA One-Time Close Construction-to-Permanent Loan to still put the 3.5% down ($21,200) which is still a stretch for us, but doable. Then we'd work our tails off to rebuild a financial buffer to handle vacancy, etc.

I'm hoping the collective wisdom here can help to steer me in the wisest direction. 

A few questions/concerns:

1. How do I gauge whether the builder's suggestion of 5bd 3bath is the right move?

2. With no comparable built duplexes on the market anywhere close, how do I gauge the market value and whether the proposed price of the build is reasonable?

3. Is this more cashflow stupid than to keep renting for $1700/mo? With credit scores around 800, roughly $100k gross household income, and only a small student loan for debt, we should meet debt:income and get the best rate available right now. That's 5.75% at our bank, yielding $3400/mo not including insurance, PMI, or property tax (which is waived for first two years). My biggest fear is applying and finding out PMI is going to be 1% or more, meaning $500/mo just evaporates and we're spending at least what we spend now and only IF we have a renter at all times.

4. Any guess as to what the closing costs are that we should budget for?

5. If the cashflow scenario is too risky, are we just stuck renting for a few more years? 

I sincerely appreciate the time, and all the content here. I've been lurking and searching since we found out about the deal, and have been bingeing the podcast. I'm very open to any advice you're willing to offer.