Owner Occupied Multi-Family Real Estate
By Pierre Mouchette | Bits-n-Pieces
What Does Owner Occupied Mean?
Owner occupied, as the name indicates, is a property that the owner lives in as their primary residence. For example, when an investor purchases a multi-family property and chooses to live in one of the units while renting others out, the property is classified as “owner occupied.”
How long do you have to live in an owner-occupied home for it to be considered owner-occupied? To be classified as an owner-occupied home, not only does the property need to be the owner’s primary residence, but they need to live in it for at least two consecutive years. This distinction is helpful, as many mortgage loans include owner occupancy as an eligibility requirement.
Do you control your finances, or are your finances controlling you? Real estate investing can lead toward financial independence. We all need a place of shelter! So why not let your housing take care of you?
Even buying a duplex as your first real estate investing move (while living on one side) can be incredibly powerful. Suppose you have found the right property and are amidst a thriving rental market. In that case, the rent money from the other unit can potentially cover the entire mortgage payment, allowing you to live free until the property is paid off. If you are a first-time homebuyer, you will only have to put down a 3.5 percent payment, and the incoming rent you receive from your tenants will help you qualify for a much larger loan.
Owner Occupied Multi-Family Financing
One- to four-unit owner-occupied properties can be much easier and more attractive to finance than even single-family homes that are used as investment properties. It can mean a smaller down payment (or even 100 percent financing), better interest rates, and lower qualification requirements.
Property Management Ease
You will never be stuck guessing about what is going on with your real estate investment holdings. Why? You will be right next door, conveniently positioned to collect rent and ensure your property is taken care of.
Investing in passive income can be a great way to secure future financial freedom, whereas keeping track of your property from afar can lead to increased issues. When you live next door, you will never have to wonder whether your property is maintaining a good shape. When tenants know their landlord is living next door, they will be more likely to treat the property as if it was their own.
Owner Occupied Multi-Family Real Estate Drawbacks
Of course, with the good comes the negative.
Being close to your tenants makes it far easier for them to complain at any time of the day or night, which can increase your repair and maintenance costs, not to mention being a huge pain. One way to avoid this issue is by giving your tenants strict rules regarding when and how they can submit maintenance requests. Enforce traditional business hours (and perhaps even a mailbox system) to ensure the tenants treat your time with respect.
Many potential renters will not want to live somewhere where the landlord lives onsite. They want the freedom to make noise, throw parties, or pay rent late (receiving a late fee, of course). To impress prospective tenants, advertise a list of amenities your home offers. What makes your property better than your neighbors? Is your rent price competitive? Will you offer to pay for utilities? Require a strict screening process and be transparent with those who apply. Consider how they feel and reassure them that you are not there to act as a micro-manager. So long as your property has plenty to offer, great potential tenants will flock to your door.
Conflicts Of Interest
Even if you find great tenants, problems can still arise. Building close personal relationships with your renters can make it difficult to be objective about your real estate investment and make purely business-based decisions.
The last thing any homeowner/landlord/investor wants is to get taken advantage of by their tenants and lose a friend. Escape this problem by setting boundaries between you and your tenants or choosing a tenant you truly trust (a close friend or family member.) Whomever you select as your next tenant needs to understand your role in the transaction. If you are upfront from the start, conflicts of interest should not occur.
Navigating Owner-Occupied Multi-Family Financing
For first-time home buyers, owner-occupied properties can be a gateway to homeownership and real estate investing at the same time. It is because numerous financing options are available for first-time property owners that allow for the purchase of multi-family properties. Mortgage lenders tend to provide more favorable interest rates and lending terms for primary residences, as they are thought to be better cared for and, therefore, less risky than rental properties. It has resulted in multiple options for aspiring homebuyers hoping to purchase a multi-family property. The following are the most common loans for financing owner-occupied multi-family homes:
How To Start Investing In Owner-Occupied Real Estate
Investing in owner-occupied multi-family real estate is an excellent way for new investors to enter the market. If you are not ready to purchase a fix and flip property or apartment complex, consider investing in a condo or duplex while renting out half of the unit. It is a step in the right direction of starting a successful real estate business, and you get to learn along the way.
Some people believe you must owner-occupy multi-family properties indefinitely. However, this is not true. You can start by investing in a multi-family property, live in it, and then move on to your next investment property. Several tax benefits come with this strategy as well. You can take a capital gains deduction if you want to sell a significantly appreciated property. If you have owner-occupied the property for the last 3 to 5 years, you can take a capital gains deduction of $250,000 or $500,000 if you are married.