Skip to content
Home » Owner Occupied Rental Property: The Magic Time Machine For New Investors

Owner Occupied Rental Property: The Magic Time Machine For New Investors

Understanding what motivates Real Estate investors is essential if you want to represent more investors in your Real Estate Business.

For an aspiring landlord, there are few things more valuable than being able to build up their investment portfolio quickly. There are lots of reasons why owner occupied rental property is a magic time machine of sorts for investors. Let me explain.

Knowing how to educate your clients will help to establish you as an investment property expert. You may even find that you want to try this investment strategy yourself!

Let’s Start With The Basics. What Is An Owner Occupied Rental?

Just as it sounds, an owner occupied rental property is one that you occupy yourself (as the owner). This means that you are the owner of the property (a single family home, a condo, a duplex or larger multi-family property… doesn’t really matter), and the property is also your primary residence.

The portion of the property that you rent to others could be anywhere from a bedroom to multiple individual units, if you’re talking about a larger multi-family property. So long as you intend to occupy a portion of the residence, this means that you can apply this investment style to meet the level of purchase that aligns with your budget and the property types available in the area where you live.

It’s Simple… You Live In The Property, And Rent A Portion Of It To Others. Here Are Some Ways You Can Do It:

Condo-Style Owner Occupied Rental

In the most budget-friendly version of what we’re talking about here, let’s assume we’re looking at a condo purchase. In this case, maybe it’s a 2 bed / 2 bath condo. If you’re lucky, you might even find a condo that features a double primary bedroom / double master suite type of layout. In this case, you could potentially live in one of the bedrooms and rent out the other bedroom long term.

Notice, I specify long term, as many HOAs do not allow short-term rentals. Of course, some HOAs limit rentals of any kind, so you’ll want to be sure that this is allowed within the building you are considering.

Single-Family Owner Occupied Rental

Similar to a condo-style investment, you can purchase a single family home and rent part of it out. You may have heard this referred to as ‘house-hacking’, and it’s truly one of the most effective investment strategies for new landlords.

In a single family home (especially if it is not located in an HOA community) will have fewer limitations, and you should have the ability to rent a room to a tenant to help pay the mortgage.

What’s incredible about this strategy for young and first-time investors, is that it fits in perfectly with a lifestyle that you’re probably already living. And by that, I mean living with roommates.

With rental rates soaring in cities across the U.S., it’s quite possible that you are already looking at sharing your monthly rent overhead with a roommate, so this is the perfect example of how you could think about a single family home purchased as an owner occupied rental.

Duplex Or Larger Multi-Family Style Owner Occupied Rental

If you’re really wanting to dive in hard on your first real estate investment, I’d argue that this style of home is one you should consider seriously. In this scenario, you purchase a multi family property, like a paired home, duplex, tri-plex or larger multi-family building.

With the property already set up for separate residences on one parcel (assuming it is zoned as such, and a multi-family use is allowed by the city/county), this means that you live in one unit and rent the other unit/s out to a long-term tenant.

Notice, I specify long term, as many HOAs do not allow short-term rentals. Of course, some HOAs limit rentals of any kind, so you’ll want to be sure that this is allowed within the community you are considering. However, most rentals over 30 days are allowed in most cities.

How To Do It: Purchasing An Owner Occupied Rental

Qualifying For An Owner-Occupied Loan

In most cases, a young (or first time) real estate investor will need a loan in order to purchase a property. To qualify for this type of loan, you’ll need to apply for a mortgage with a trusted loan officer.

To qualify, you’ll need to plan to live in the home yourself (as your primary residence) for a minimum number of years. Loan programs vary, but in many of them, the required time period is a year or two. That’s a nice timeframe, since it’s similar to your most likely alternative, which is renting a property from someone else. In most cases you’ll be looking at around a 1-year term for rentals as well.

The lender will qualify you for a purchase price range. They look at things like how much cash you plan to use as a down payment, as well as your income and credit qualifications. In addition, you’ll be committing to live in the property as your primary residence for the required time frame. Keep in mind, there are exceptions in most loan programs that would allow you to break this agreement to time frame for specific reasons (think job transfer, etc.). You can work with your Lender to determine the rules for your specific loan program.

Making It Work For You

Assuming you qualify for the purchase price on your own, the qualification for the loan will be very similar to purchasing a home that you don’t intend to rent out. However, you can show the lender that you have a tenant lined up to lease a portion of the space from you. Whether that’s a bedroom or one side of a paired home or duplex, many lenders will take that supplemental income into consideration if you can provide them with with details of the tenant and lease agreement. This means you may qualify for a higher purchase price.

The Benefits: What’s In It For You?

Having a roommate or tenant living in a portion of your property has so many benefits! The following are a few that might matter most to a new investor. But you should know that there are a LOT of reasons to consider a roommate or tenant in an owner occupied rental. You, too, can house-hack your way to a better financial position!

Financial Benefits

In many markets, the price of rents has risen along with housing prices, and in some cases rental growth is outpacing price growth! This gives investors in owner occupied rental property a unique opportunity for financial benefit.

The Obvious: A Lower Cost Of Living For Yourself

Consider the following example, if you were to rent one room of a single family home that you occupied as your primary residence. Let’s be clear, once again, that we are NOT talking about short term rentals, here. This is not an Airbnb type of model.

The Less Obvious: Lending Benefits

If having incredibly low monthly overhead isn’t enough, it’s also worth considering how much less of a down payment you need to get started purchasing property. With an owner-occupied purchase, you aren’t required to have the 25% (or higher) down payment that is required by most investment property loan programs. Sometimes a lender wants an even higher down payment percentage, and will require high cash reserves on top of that.

However, when you’re going to live in the property, you can purchase using an owner occupied loan product. This gives you the ability to invest a smaller down payment, and increase your leverage (remember how I said that house hacking was a magic time machine for investors?) If you’re saving money on both your down payment and your monthly overhead… imagine how much faster your savings will stockpile.

Maintenance Benefits

It goes without saying that owners tend to take care of a property more carefully when they own it vs. rent it. That’s precisely why banks are willing to lend more leniently to owner-occupied mortgagees vs. landlords.

When you live in a property yourself, you’re going to see it every day, and notice what needs attention. Maintenance items are less likely to build up, and you may even find that you enjoy aspects of improving and maintaining your investment when you also call it home.

Maybe you give the paint an update, or maintain the landscaping and water the lawn more regularly when you’re throwing your own backyard barbeques. Or maybe you dabble in some home improvement projects like upgrading your kitchen backsplash so you can enjoy a more modern feeling kitchen where you host friends.

Whatever the example, I think you’ll agree that these small benefits add up over time, as you improve the feel, curb appeal (and hopefully value) of your property.

It’s not commonly discussed as a primary benefit to house hacking, but you’re likely to care for a property better when you’re living in it yourself.

Tax Benefits

While tax benefits aren’t felt immediately, over time these can add up to big bucks!

First, plan on deducting your mortgage interest from your taxes! If someone else is paying the majority of your mortgage each month, this mortgage deduction on your taxes feels like a real bonus… even a double dip. Using a house hacking strategy like owner occupied rental property as a way to get your foot in the door of investment real estate has benefits that will compound.

If you end up selling the property, and you’ve lived in it long enough to avoid capital gains taxes (check with the IRS for current rules), you’ll also avoid the taxes and recapture of depreciation you’d have to pay on a traditional rental property sale.

It’s hard not to get excited about that!

Future Benefits

Once you’ve fulfilled the agreement of your loan program (maybe it was to occupy the home for at least a year), it’s easy to see how various options might unfold. By then, you may have built up equity in the property that helps your credit and financial qualifications for subsequent purchase.

You may have seen an increase in rental rates that would allow you to collect more in rent from your tenant. Maybe the rent will even begin to cover the full mortgage payment or even better… MORE.

All of these scenarios eventually lead to monthly cash flow, and living without a monthly mortgage payment out of pocket! It’s a pretty sweet deal for landlords, and owning rental properties can be addictive! Don’t say I didn’t warn you.

If you opt to jump into another investment, there are even more options to consider. You’ll likely be able to qualify for another owner occupied purchase, so you could either look at an upgraded home for yourself, or purchase another owner occupied rental property to continue the wealth building cycle and house-hack at a higher price point, or in a larger property/with more units.

At some point, so long as you play this house-hacking game with fixed mortgage rates and reasonable down payments, you’ll build equity and see your monthly overhead increasingly covered by your tenants as rental rates increase over time.

The Magic Time Machine Effect Of Owner Occupied Rentals

So what are you going to do with all of the savings you accumulate from having someone else paying a portion of your mortgage?

This is where the magic time machine factor of house hacking is undeniable.

One option: you could overpay the principal balance on your mortgage with your monthly savings. This will speed up the timeframe for the loan being paid off. If you’re taking the long view on owning rentals, nothing cash-flows better than a paid-for property! Applying additional principal early in the payment schedule will compound into a quicker payoff. That’s an ideal added benefit for young landlords.

Alternatively, you could stockpile your savings and invest them toward a subsequent real estate investment. Combined with your regular savings rate, saving (instead of spending) what you save on your mortgage by house hacking will surely allow you to generate that down payment money for your next purchase faster.

And finally, consider applying your savings (or even a portion of them) to your future in the form of Retirement Investing! This option has my heart.

The sooner/younger you save for retirement, the more time for those precious dollars to compound. If you’re curious about that, or wonder how many house hacks it would take to magic-time-machine yourself into retirement, I’d recommend you take a look at the following posts.

If you’re curious, retirement planning resources specifically curated for Real Estate Agents can be found on this page.

Who Should Consider House Hacking?

I’d venture to guess that house hacking is especially appealing to those who are already entrepreneurially minded. Maybe some of you are even budding Real Estate Investors yourselves – but if you have any budding investor clients, it’s time to check in and make sure they are familiar with this strategy!

Summing It Up – Why You Should Investors Purchase Owner Occupied Rental Property?

House hacking is an incredible tool for real estate investors, and one that you can pull off even if you’re a newbie. Even if you decide that being a landlord isn’t for you… I’m confident that using owner occupied rental property as a part of your wealth building strategy is the closest thing to a magic time machine you’ll find. You’ll be glad you put these financial benefits to work for you.

An owner occupied rental is the ideal first time purchase for a newbie landlord. You’ll be honing your landlord skills while you dabble in real estate investing. And doing it this way as a first time purchase keeps the stakes low if you decide that more real estate investments are in your future. I think we’ve already sufficiently covered why it’s worthwhile to take that risk.

Your clients will build wealth and be ready to purchase their next property so much sooner with some common sense planning and with these financial benefits as a tailwind!

Looking for more great Real Estate content? Check out additional topics on our Agent Blog!

Leave a Reply

Your email address will not be published. Required fields are marked *