Should You Be An Owner Occupied Real Estate Investor?

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Owner Occupied Real Estate Investing

One of the more interesting facets of buying properties to rent is the option you will have to actually LIVE there.

This is also known as owner occupied.

Or you can take the more traditional route and live elsewhere.

This makes you the landlord.

Both scenarios will make you money when you settle on the right tenants willing to pay the rent you are dreaming about. But they have very distinct advantages and drawbacks, so give it some serious thought.

We are going to help you understand the pros and cons of being an owner occupied real estate investor. If this just isn’t for you, there are countless ways to invest in real estate. We recommend exploring other options, as this can be a great investment!

A two family real estate investment.
This two family would make a great owner occupied real estate investment.

Your Primary Residence

The home you live in the majority of the time in any given year is considered your primary residence. It’s also owner occupied because, well, you own it and along with the fam, call it home. It’s where you hang your hat. However, many real estate experts agree that the single family home that you live in is not an asset or a good investment. It’s where the heart is, but not where the money is. Ok, enough with the home related sentiments. Let’s get back to business.

Number Of Units

There are also multi family structures out there with the possibility of having several units to rent, and also the option to live in one on site. Most owner occupants look for 2 to 4 units, because buildings larger than 4 units are considered to be commercial real estate. As a result, this makes the process of getting a mortgage more complicated.

For newbies in the game, this can get overwhelming faster than you can say “landlord.”

So, let’s say you’ve stumbled on a great duplex that’s move in ready. You have two units and can either live in one, or rent both out. Let’s explore both options!

Being An Owner Occupant

This is known as the simpler option when compared to living away from the property.

Here are some of the reasons it’s a good idea to live in your duplex, or multi family property…

1. Higher Quality Tenants.

Owners often don’t want to live next to bad neighbors, so they tend to be selective about who they allow to move in. Also, renters who plan to behave badly usually like to be as far away as possible from their actual landlord. It is easier to get away with things when the landlord lives across town, or even in another state!

2. No Property Management Costs.

Hiring a property manager can take 10 percent or more off your rental income. If you live there, you’ll be familiar with the duplex, have better chances it will be well maintained, and you can fix things as soon as problems rear up. This puts the burden on your shoulders, but if you are looking to squeeze every penny out of the property this can be a great option!

3. Writing Off Ownership Expenses.

Owners that occupy their rental buildings get to write off all of their rental expenses against their rental income. For example, if you have to repair a busted sewer connection, unfortunately, you can’t write off that repair to your personal residence. If the sewer line for the duplex breaks, and you live in one of the units, you can write off half the repair cost that applies to the unit where your tenants live.

4. Depreciation Write Offs.

You can also write off depreciation on the tenant occupied side of the duplex. Depreciation is when property owners claim a portion of their building’s value as a deduction against expenses every year, simulating the gradual aging of the building. Typically, the depreciation carries hundreds, if not thousands, of dollars a year in tax savings that a single family homeowner isn’t legally allowed. As a result, this is a serious tax advantage that only real estate investors have available to them.

5. Homeowner’s Benefits.

As the resident of half of a duplex, you get all of the same deductions as any other homeowner. You’ll be able to deduct half of your mortgage interest, half of your property taxes and half of any deductible points that you pay. All of those write offs get filed on your Schedule A form as itemized deductions.

6. High Visibility.

Your tenant or tenants will see you every day. That means your tenants are less likely to party the night away, sneak in pets, store trash on the porch, annoy the neighbors with loud music, or a zillion other things that could happen without you knowing about it. Big brother is watching!

7. Rent Collection.

Collecting rent is just a knock on a door away. There will be no way your tenants can claim their check got lost in the mail. You can simply ask your tenant to leave the rent check in an envelope under the mat. If it isn’t there, just knock on the door!

8. Emergency Repairs.

When things go wrong in the middle of the night, as things generally do, you can dash over in your pajamas to fix the leaky sink, running toilet, or set out mousetraps because one of your tenants has a phobia of rodents with long tails. As a result, this could potentially save you hundreds or thousands of dollars on emergency repairs.

9. Property Maintenance.

You will have only one lawn to water/mow and typically a shared driveway to shovel. If you are taking care of this yourself, you won’t be paying someone else for mowing and plowing.

10. Live For Free.

If you play your cards right, it is actually possible to live for free as an owner occupant. This is often referred to as house hacking. If the rental income from the other unit covers your mortgage and other housing related expenses, you are effectively living for free! Your tenant is paying down the mortgage for you.

Here is a great video by Graham Stephan that talks about how you can live for free by investing in multifamily real estate…

Renting Out The Entire Place

Maybe being an owner occupant just isn’t for you. Some people value their privacy, and they just don’t want to live that close to someone. Many people choose the option of renting out the property and living elsewhere, and there are perks that come with this choice…

1. Fewer daily responsibilities.

If you’re living in a different neighborhood than your duplex, or even another town, you may choose to hire a property manager to handle the day to day operations. Professional property managers dig right in even before your duplex is rented. They will help market it, show the place, screen potential tenants and do background checks. You can count on them to draw up the lease before tenants move in. They will be in charge of collecting rent each month. If something goes wrong in the house in the middle of the night, guess who gets called? Hint: it’s not you.

The property manager will be the on call, 24 hour a day responder, and will have a list of plumbers, carpenters, plow owners, lawn care people, electricians, and any other specialist you may need for fast fixes. Property managers also oversee the technical side of rentals. If you end up with tenants who fall behind on their rent, the site manager will hunt down late payments and enforce penalties. In the worst case scenario, if you have to take your tenants to court, the property manager can provide record keeping evidence and help you learn your rights as a landlord.

2. Less temptation to nitpick.

Let’s face it, if you live in half your duplex, the temptation will be there to track your tenant’s comings and goings at their half of the building. Maybe they left a trash can out at the curb for an extra night after pick-up. Or have a habit of blasting Tom Petty songs while they house clean. Or ignore the free newspaper tossed on the driveway. These are MINOR nuisances you don’t need to worry about or even know about. Nobody likes a nag!

3. Let them do the yard work.

Who says you have to lug over a lawnmower every weekend or hire a plow to clear away snow when it storms? Write it into your lease that your tenants will take care of this, and you will save your own time or the money associated with hiring pros to do it for you. Problem solved!

4. Home is where the heart is.

Perhaps the most obvious reason of all is that you have a house you love, and don’t want to move into your rental property! There are still huge benefits to owning real estate other than the single family home that you may reside in.

Taxable Rental Income

Regardless of whether you decide to live in half the duplex or live elsewhere, rental income is taxable.

Any money you receive from owning a rental property is considered taxable income by the IRS. This includes rent, of course, but also any other money handed over to you that you keep, such as part of a security deposit not refunded.

Rental income is usually reported on Form 1040, along with your other income. The good news is that you can deduct certain expenses from your total rental income to reduce a big hit on your tax liability.

Document everything! Any repairs you make on the duplex or upgrades like a new fridge can be deducted, as can depreciation on the property.

Short Term Rental

If you aren’t interested in being an owner occupant, but you also don’t want to be a landlord, another option is to get in on the short term rental boom. Sites like Airbnb allow you to rent out your spare room or unit to short term tenants. If you end up with a tenant you don’t like, the good news is they won’t be there for very long! If you have a spare unit but you don’t want to commit to a long term tenant, short term rentals could be the way to go.

What You MUST Know Before Being A Landlord

1. Have a strong, specific, binding lease.

Landlord tenant laws vary from state to state, but you will need to spell out every detail from what to do if rent is late, to early termination, to security deposits. Will your tenants be responsible for utility/trash removal/internet/water service? Include this in the lease. We recommend talking to a lawyer or an experienced real estate investor about this.

2. Know your rights.

For instance, unless it’s the case of an emergency, you can’t just barge into the rental unit without advance notice. That’s what’s known as infringing on their privacy. And being kind of a jerk, too.

3. Get landlord property and liability insurance.

Your homeowner’s plan is not sufficient. You need to be protected if someone is injured in the rental home or if the property is damaged. Talk to your insurance provider!

Why Owning Real Estate Is A Good Investment

1. You Make the Decisions.

Whether you decide to move into the duplex or rent both sides, you have the immediate perk of becoming your own boss. You choose what property to invest in, which tenant will move in, how much you will charge in rent and how you will manage and maintain the property. This can be pretty cool compared to the fact that in your office day job, you answer to the boss, or several levels of bosses! It just feels good to be in charge for a change.

With other investments, like the stock market, you are not in control. The board of directors ultimately decides what direction the company is going in. You are simply along for the ride! If you are seeking more control over your investments, real estate could be a great alternative to the stock market.

2. Property Appreciation.

Watch your money grow! One of the best things about investing in real estate is that you can buy it using only a small amount of your own money, then borrow the rest from a lender, often four to twenty times more. As an average on the low side, investment properties appreciate by around 5 percent each year. Sure, there’s a mortgage to pay down, but if you’ve wisely calculated the numbers, what you are earning in rent will cover the mortgage, and leave you with a little extra to put towards your NEXT rental. If you continue this process, you can build a huge portfolio of real estate!

3. Your sweat equity is meaningful.

Your hard work – and the help of anyone else you can rope in – will add value to the rental property with upgrades and ongoing maintenance. So, get over there and reseed the lawn, paint the shutters, replace the washer/dryer, put in some pretty shrubs or other landscaping, tear up the ugly linoleum and refinish the hard wood floors. If you do the work yourself, the value of your work will be far higher than the financial cost. Property experts say it’s good practice to renovate between tenants so that everything stays fresh and up-to-date.

Is real estate the newest get rich quick scheme? Certainly not. However, it has been making average people millionaires for hundreds of years. If you are patient, real estate investing could be your ticket to success.

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