Understanding Owner-Occupied Properties: What Investors Should Know
Sarah Sharkey5-minute read
January 12, 2023
A real estate investment portfolio could provide the base of a solid financial future. However, budding real estate investors often face challenges finding the financing they need. That’s when understanding owner-occupied properties can come in handy.
Let’s take a closer look at what an owner-occupied property is and how it can be useful to investors.
What Does “Owner-Occupied” Mean?
An owner-occupied property is a piece of real estate in which the person who holds the title (or owns the property) also uses the home as their primary residence. The term “owner-occupied” is commonly associated with real estate investors who live in a property and rent out separate spaces to tenants.
In the context of real estate investing, owner-occupied properties provide an opportunity to tap into attractive financing options. After all, most homeowners are able to find much more attractive mortgage terms than real estate investors. But you’ll still have the chance to create rental income with the property by renting out spaces you aren’t using.
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Owner Occupancy Guidelines
The allure of obtaining owner-occupied property is that you can enjoy the most attractive financing opportunities that are reserved for homeowners, not investors. However, you’ll need to meet specific requirements in order to qualify as an owner occupant.
In general, you’ll need to move into the property within 60 days of closing. Additionally, you’ll need to live in the property for at least 12 months to qualify as an owner occupant with most lenders.
In contrast, you could obtain financing as an absentee owner. An absentee owner is a property owner that doesn’t live onsite. For example, a property owner that rents out a single-family home without living onsite would be considered an absentee owner.
However, each lender sets its own owner occupancy guidelines. It’s critical that you read the fine print of your mortgage lender’s owner occupancy requirements. Otherwise, you could be committing mortgage fraud.
Owner Occupancy And Real Estate Investing
Real estate investors can capitalize on the opportunity presented through owner-occupied financing. In general, it’s significantly easier to find a lender willing to finance an owner-occupied property than finding a lender willing to provide financing for a second property.
Additionally, lenders are often willing to offer lower interest rates to borrowers pursuing an owner-occupied property.
With that, real estate investors often choose to leverage the financing options available through owner-occupied financing. As a new real estate investor, you may choose to pursue an owner-occupied property that will allow you to produce a rental income.
For example, many choose to dive into real estate investing with an owner-occupied multi-family property. With this choice, the real estate investor can live in one unit and rent out the others. Plus, they can take advantage of more accessible financing options to start building their investment portfolio.
The Advantages And Disadvantages Of Owner-Occupied Rentals
As with all investments, there are some advantages and disadvantages to consider with owner-occupied properties. Here’s a closer look.
First, let’s explore the advantages associated with investing in owner-occupied real estate.
- Investors will only need one mortgage for both their primary home and investment property. Managing a single mortgage payment can be more financially viable than financing multiple investment properties.
- Investors are near their tenants in the event of an emergency. If you live on-site, you’ll be able to handle any emergencies that arise quickly. Plus, you can ensure that proper care is being taken to maintain the property to your standards.
- Certain loans are only available to owner occupants. In most cases, owner occupants can tap into more affordable financing opportunities than absentee owners or investors.
Of course, there are also some disadvantages to consider when investing in owner-occupied rentals.
- Owner occupancy could mean living with noisy neighbors. A multi-family property means living in relatively close quarters with your tenants. With that, you could be dealing with loud neighbors or tenants that are ready to complain while you’re at home in your unit.
- Owner-occupied investors could have a harder time finding renters. In some cases, tenants may be reluctant to live on the same property as their landlord.
- Becoming a landlord is not passive income. As a landlord, you’ll be responsible for managing tenants and maintaining the property. Unfortunately, contrary to public perception, managing rental properties requires a considerable amount of work. Be prepared to handle the additional workload or find a property management company to handle the day-to-day operations.
Financing Options For Owner Occupants
If you are considering investing in real estate as an owner occupant, you have access to several financing opportunities. Here are some attractive options to consider.
An FHA loan, backed by the Federal Housing Administration, allows you to put down as little as 3.5% on a property. Many homeowners choose to pursue an FHA loan due to the low credit requirements. Plus, you could even have the closing costs rolled into your loan.
FHA loans are only available to homeowners that will use the property as their primary residence. With that, you must move into the property within 60 days of closing to qualify for an FHA loan. But you’ll be able to buy a property with up to two units through an FHA loan, which opens opportunities for real estate investors.
VA loans are backed by the Department of Veterans Affairs. This type of loan is only available to members of the military or veterans that meet the service criteria.
If you qualify for a VA loan, you’re able to put down 0% to close on the property. But you’ll have to pay a funding fee. VA loans are especially attractive because there’s no private mortgage insurance attached.
VA loans will allow borrowers to finance a single-family home or a property with up to four units which can double as a rental property. Like the FHA loan, you’ll need to use the property as your primary residence if you pursue a VA loan. That means that you’ll need to move into the property within 60 days of closing.
A conventional loan is not backed by a government agency. With that, the requirements for obtaining a conventional loan are more stringent. In most cases, you’ll need to have a credit score of at least 620 and a debt-to-income ratio (DTI) of less than 50%.
But if you can qualify for a conventional loan, you may be able to put down as little as 3%. As far as occupancy requirements, you’ll need to check with your specific lender before moving forward to ensure you can qualify.
The Bottom Line: Is An Owner-Occupied Property Right For You?
An owner-occupied property can be a great option for both real estate investors and home buyers searching for their primary residence. The attractive financing opportunities make this type of homeownership worth pursuing.