Pros and Cons of an Owner-Occupied Property

By: , Contributor

Published on: Dec 30, 2019 | Updated on: Dec 31, 2019

Living under the same roof as your tenants has its ups and downs.

There are different ways to invest in real estate, one of which is to buy an owner-occupied property. There are benefits and drawbacks to living in your rental property and sharing that home with tenants, so here's what you need to consider.

What is an owner-occupied property?

An owner-occupied property is an investment property you buy to generate rental income but also live in yourself. Multifamily homes work well for this setup because they lend to naturally separate living quarters.

For a home to be classified as having an owner occupant, it needs to be the landlord's primary residence; a second home doesn't count. Also, the landlord must live in that home for at least two consecutive years.

Why is the owner-occupant distinction important? It could make a difference when applying for mortgage loans. Some loans, for example, are available to owner-occupants, but not to real estate investors who want to buy homes and rent them out to other people. These home loans tend to offer benefits like more competitive interest rates and lower down payments. As such, lying about buying an owner-occupied home constitutes mortgage fraud and could result in serious consequences (which means fines and, in some cases, jail time).

Benefits of an owner-occupied property

There are plenty of good reasons to invest in an owner-occupied property. For one thing, as mentioned, you may be eligible for more affordable borrowing options when you take out a mortgage. That not only makes your home less expensive from the start, but also lowers the risks associated with buying it (such as not being able to keep up with your mortgage if your property taxes and maintenance costs climb).

Along these lines, living in your investment property means you don't have to take out a separate mortgage to buy a home of your own. The result? A huge amount of savings. And, the investment property you buy may offer certain amenities that you wouldn't find with a home you'd buy just to live in yourself.

Another upside to buying an owner-occupied home is that property management, in many ways, becomes easier. When you're on-site all the time, it’ll be easy for you to know whether the home is being properly maintained and whether tenants are treating it well and adhering to the rules of their lease agreements. And when issues with that home do arise, you'll be right there to tackle them. Landlords who live off-site are often forced to travel at all hours to deal with the emergencies their tenants report. And off-site landlords often feel compelled to hire property management companies to handle the tasks they’re too far away to tackle. By not having to shoulder that cost, you stand to save a lot of money.

Drawbacks of an owner-occupied property

Though there's much to be gained by buying an owner-owned home, there are some downsides to consider as well. For one thing, you'll be sharing a home with your tenants, which exposes you to a host of potential issues, from unwanted noise to less privacy to more complaints. Think about it: Your tenants may be quick to gripe about seemingly minor issues and demand quick fixes when they know that you're right there to handle them. That's not necessarily what you want.

There's also the potential for tax headaches when you buy an owner-occupied home. When you own a multifamily rental property you don't live in, you can deduct certain costs related to maintaining that property -- home repairs, utilities you pay, and homeowners insurance premiums, to name a few. When you live in the same home you rent out, you can still take a number of deductions, but you can't write off the entire cost of maintaining that home -- you can only deduct your costs associated with having tenants. The result? A complicated tax-filing process, so be prepared for that.

Another thing to consider is that you may have a harder time finding tenants if you're planning to live under the same roof as them. Just as you might crave privacy in your living quarters, so too might your potential tenants. As such, you may need to offer discounted rental rates to help tenants get over their hesitations, which translates into less income for you.

Should you buy an owner-occupied home?

Buying an owner-occupied property could be a smart investment strategy -- but it can also backfire. If you're going to go this route, know what you're getting into, and recognize that while you may give up a degree of privacy and freedom, you'll benefit from a huge amount of housing-related savings, not to mention the potential for a steady, lucrative stream of rental income.

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