If you are looking to buy a home, but at the same time don’t want to miss out on the benefits of owning a rental property, there is a way you can kill two birds with one stone. An owner-occupied rental property where the owner lives in one of the units, while other units are rented out is probably the best option for you.
In fact, it’s a good time to purchase a rental property in America given the phenomenal increase in rents recently. U.S. renters paid $441 billion in rent in 2014 compared to $420 billion in the previous year, an increase of nearly 5 percent. Some metropolitan areas witnessed even a 30 percent increase in rents.
Apart from earning some passive income from rents which you can use to pay towards your mortgage installment, there are many advantages of buying an owner-occupied rental property.
Lower interest rate
If you’re buying just a rental property, you will need to take out a mortgage for an investment property. These mortgages typically have higher rates and higher credit score requirements than traditional, owner-occupied mortgages. Down payments can also be higher unless you are taking out a Federal Housing Administration (FHA) loan. However if you are going to live on the property, then you can get better rates.
Tenant screening becomes easier
If you are going to live on the property, then only disciplined and well-behaved tenants will prefer to rent it. Undisciplined tenants usually don’t want to live next to their landlord. It will make tenant screening a lot easier for you. However, it doesn’t mean that you should not do your due diligence while screening tenants. You should still conduct credit and background checks.
When you own a rental property, you have many responsibilities as a landlord. They include tenant screening, repairs, maintenance and rent collection. Since these tasks are time consuming, many landlords hire a property management agency. It can reduce the monthly rental income by almost 10%. But as you will be living on the property, you may not find it difficult to manage the property on your own.
Help you reduce ownership expenses
If you own a small owner occupied rental property, then you can surely reduce your homeownership expenses. Landlords can deduct maintenance and repair costs on their rental property from their income when they file tax return. In an owner-occupied rental property, any expense that applies to the tenant occupied units, can be deducted from the rental income. You can also write off depreciation on the tenant-occupied parts of your building.
Needless to say, the benefits of owning an owner-occupied rental property are numerous. However, keep in mind that you would need to buy a multifamily home for enjoying these benefits. It may require a huge investment, undoubtedly much higher than what you need to buy a single family home. Before making the move, you should have your finances in order and take all necessary precautions to minimize the risks factors inherent in such big investments.