Opportunity cost of FHA vs conventional mortgage?

[Pat Needham]

Hi fellow BP members!

I'm considering buying a duplex mid-next year within the 400-500k price range to begin my house hacking journey. I'm aware of FHAs being 3.5% down payment compared to 5-20% for conventional, with the downside being a mortgage insurance premium requirement. Say I were to purchase a property for 500k (it will probably be less, I'm just using this as a round number easy for math), where FHA downpayment would be $17.5k compared to conventional anywhere between $25-100k. I have enough saved up for that lower FHA amount, but for conventional, by around April next year I'd only be able to cover roughly $40k after withdrawing from a non-retirement investment account.

Suppose I were able to find a 10% downpayment conventional mortgage where that 40k becomes the amount necessary, what are the typical decision-making factors for which to choose? The thing I'd like to optimize for is being able to purchase a triplex or 4-plex 2-3 years later in a nicer part of town. I'm not trying to be cash flow positive; my bigger goal is long-term wealth. Right now I'm paying $1500/month rent, so even if whatever I end up purchasing next year results in a few hundred monthly cost (if monthly rental income doesn't surpass mortgage + insurance + property taxes etc.), I'd still be very glad about eliminating over two thirds of my current comparable living expenses!

My main frustration over this FHA vs conventional mortgage decision is not knowing which would be best long-term given my aspirations of acquiring more property down the road. Because say I go with conventional next year, that's around $25k that can no longer be kept in index funds which could return 5% on average, but the benefit would be that I can then choose FHA couple years later on a more expensive property. Could anyone else who has gone through this type of decision making shed light on what factors became most relevant?

Thanks,

Pat