This is by design...That should tell you what you need to know.

Someone told me to treat the transfer as 1 for 1, and then treat the 2nd lot separately as a gift donation. 

Finally, they are so flexible that you can designate who gets what percentage, etc.

Based on your portfolio design you can find a cashflow or appreciation small multifamily or several single family. 

Was gifted down payment and received conventional loan.

So, if I did do it that way I would need to pay gift tax on the money he gave me for the rehab, correct?

Doing it this way allows you to ease your way in and costs you less up front - down payment for an owner-occupied property is much lower than an investment property, you may qualify for down payment assistance and can even use funds as a gift from a family member if that's an option. 

The 400k$ quote is for a quite extensive whole house remodel (moving walls, windows, openings, expanding footprint and +1 bath, +1bed) and includes design, consultants and permits.

Unless you're prepared to just call it a gift, you want to get the documentation right up front.

My tenants pay directly to a pre-designated bank account at our local credit union.