February 4, 2020. By Anthony Norris:

Getting into real estate investing can be challenging, especially if you have limited experience and resources. A good starting point, however, may be to research the value of owner-occupied properties. This style of living provides an alternative source of income while you get a real taste of what property management takes. Such experience can translate into informative real estate investments in the future.

One of the biggest draws to pursuing an owner-occupied rental property is the financial advantage. With the right rental rates, you can live nearly mortgage-free. In an ideal situation, you will be earning more than your monthly mortgage. In addition, by living in the property, you can save having to pay 5-10% of gross rental income to a property management company. Not only will your bank account like the investment, but banks also typically offer lower rates to finance owner occupied properties as apposed to other rental properties. For current or former members of the military and their spouses, VA loans offer more lenient requirements, and provide the option for zero down payment. Many options are available for non-military borrowers as well, and consulting a financial professional can lead to securing favorable terms.

From a tax point of view there are many advantages to this type of ownership. To begin, costs allocated to tenants can be written off and deducted from your rental income. Furthermore, tenant occupied areas of the property can be depreciated for tax purposes. Once you decide to sell your property after a certain number of years of ownership/residence, any capital gains get taxed at a lower rate.

As we all know, there is no such thing as a free lunch. Owning, managing, and living in a rental property has its downsides, the first of which being finding and setting up a property that is a good fit. I myself have heard from a few friends the many challenges that come with finding the right property for the right price and in a desirable location. Especially on the east coast, finding these types of properties can come with high price tags and/or major remodeling needs. On top of that, you must contend with local and state regulation, zoning laws, permits, insurance, and so on. For rental properties that need remodeling, licensed contractors are required to keep everything up to code and comply with liability issues.

Once you have financed your purchase, gone through the red tape, and completed any remodeling, the next question surrounds tenants. Living with tenants offers many pros and cons. One advantage is the fact that tenants are much more likely to be on their best behavior knowing the owner is in the building. Because of the proximity, however, you as the owner are likely to hear about even the slightest of problems, thus posing the possibility of driving up maintenance and repair costs.

Another potential issue between owners and tenants is forming close relationships which can lead to conflict of interest and the possibility of being taken advantage of. Making tough decisions such as raising rent become far more difficult when you factor in a close relationship.  To avoid such a situation, it is advisable to make terms very clear from the start, so you don’t always have to feel like a guilty party.

A final factor to consider is how much you value your personal space. Purchasing a larger home with extra rooms for renters will mean that you are going to have to share common areas such as the kitchen, bathroom, and living room. A solution to this would be finding a property that has self-contained units that have their own kitchen, bathroom(s) etc. However, this option may lead to a higher purchasing price, increased maintenance, and leave you with less space.

An owner-occupied property offers many benefits; however, be sure to account for the negative aspects of ownership as well. Taking a deep dive into the dollars and cents is highly recommended, and consulting with a financial advisor is a great starting point.