Most real estate investors buy properties that they will never live in or occupy. However, the owner-occupy strategy is becoming more popular with first time home buyers and investors. The strategy is used when someone buys a property that has two or more units, and then lives in one of the units while renting out the other(s). For example, my client recently purchased a single family home that has a basement apartment. He is now living upstairs and the basement unit is rented to a tenant who pays monthly rent. Parents with kids who will be attending university or college are also taking advantage of this strategy. Instead of paying for residence or renting an apartment near the school campus, parents are buying homes where their children will live for the duration of their studies.
While this strategy is not for everyone, it can allow individuals to become homeowners and investors much sooner than otherwise thought. Here are some key points to consider before using this strategy.
Helps minimize your expenses: This is the main attraction for many buyers because the tenants in the other unit(s) pay rent each month. This rental income reduces your expenses because it can be used to pay part of the mortgage, insurance, property taxes, maintenance and repairs, utilities, and to save money to go towards the next property.
Financing: The greatest challenges to most home buyers and investors is saving enough money for a down-payment and qualifying for the mortgage. However, financing may be simpler when it comes to owner-occupied properties. Carmen Campagnaro, President of Pro Funds Mortgages, says that “if the property is intended to be owner occupied, buyers can get in with as little as 5% down. This is a great strategy for conserving capital for future investments but the higher carrying costs need to be factored in to determine if it makes sense. When asked if it is easier to get approved for a mortgage for an owner-occupied property, Campagnaro explains that, “the lending criteria for owner-occupied properties is not as onerous compared to the lending criteria for an income property. There is some flexibility with clients who are self-employed when buying an owner-occupied property but not so much when buying an income property. Guidelines require borrowers to have a strong personal income when buying rentals because often only 50% of the rental income can be used to qualify. Lenders also look for buyers that have strong net worth and often, lenders will have a net worth requirement that must be satisfied in order to qualify on an income property. This isn’t the case if the home is owner occupied”, says Campagnaro.
Use Purchase Plus Program to add value: Buyers of owner-occupied properties may qualify for the Purchase Plus Improvement program. This program offers another financing choice to borrowers who are building new homes, or those who want to undertake small or large scale improvements to existing homes where the improvements will increase the value of the property.
Living with tenants: Let’s face it, not everyone is suited to live in the same building as their tenants. Yes, it’s easier to keep an eye on things, but if you like living alone and enjoy your privacy, this strategy may not be for you. When searching for tenants, look for ones that will be compatible with your lifestyle. If you enjoy quiet Friday nights out on backyard patio, don’t rent to people who can’t wait for Friday night and for the party to begin!
Imagine buying an owner-occupy property only to discover that you made a mistake and want to move out. Maybe you want a bigger place, move closer to work, or maybe living with tenants isn’t for you. There are a few options available to you if this happens including:
- Renting out your unit – but be sure that the property will provide positive cash flow before doing this or else you’ll end up taking money out you own wallet to cover some of the expenses.
- Helping someone become a home owner through a rent-to-own program.
- Selling the property using the Agreement for Sale strategy.
The owner-occupy strategy is one of the best ways to begin growing a real estate portfolio. It can be profitable for investors and the average home owner alike – as long as it’s done right!