How to Make Money with an Owner Occupied Rental Property

Wondering how to make money in real estate? One of the best real estate investment strategies is purchasing an owner occupied rental property. An owner occupied property is one where the property owner decides to live in one unit as their primary residence (house hacking) while renting the rest out. Easier financing, living for free, and property management convenience are some of the reasons why investors prefer buying owner occupied rental property. This strategy is especially useful for first-time multi family real estate investors who want to learn how to manage their long-term rentals or short-term rentals. Investors have the option of changing from owner occupied to a rental property strategy later if they wish.

Here are some of the benefits of an owner occupied short-term rental or long-term rental:

Lower maintenance and management costs – When a real estate investor lives in his/her investment property, there is usually no need to hire a property management company. As a result, management costs are reduced significantly.
High-quality tenants – Tenants who live in owner occupied properties tend to take better care of the units, knowing that the owner is right next door.
Writing off ownership costs – Investors that live in their multi unit properties are allowed to deduct their rental expenses from their rental income before filing tax returns.
Depreciation write-offs – An owner occupant is also allowed to write off depreciation on the parts of the property occupied by tenants. This could result in hundreds or even thousands of dollars in tax savings annually.
Capital gain avoidance – If the property owner lives in the building for at least two years after buying, they are likely to enjoy owner occupied rental property tax deductions when selling.

Owner occupied investments also come with some drawbacks:

Conflicts of interest – Cultivating close relationships with your tenants could make it difficult to make sober business-based decisions about your investment property. As a result, tenants are likely to take advantage of you. To avoid this, be sure to set clear boundaries between you and your residents.
Limited tenant pool – Many potential tenants will not be excited about the idea of living in the same building with their landlord. They want the freedom to pay rent late or throw parties. Therefore, the idea of an owner occupied property might put some renters off.
Tenant grievances – Living in the same income property with your tenants will make it easier for them to complain about the slightest problem. Besides being stressful, this could end up increasing your maintenance and repair costs significantly.

So, how do you go about investing in an owner occupied rental property?

How to Invest in an Owner Occupied Rental Property

1. Decide What You Want

The first step is to decide exactly what you are looking for. Here are some of the questions you should ask yourself before buying a rental property for this investment strategy:

How much are you willing to spend?
What neighborhoods/cities are you interested in?
What kind of property do you want? Are you interested in buying a duplex, triplex or fourplex?
What property condition do you prefer? (Move-in ready, distressed, etc.)

2. Start Searching

Once the criteria are ready, you can begin looking around for a great owner occupied rental deal. Here are some of the strategies you can use for your property search:

Craigslist – The ‘for sale’ section of Craigslist could be a great place to look for potential deals. In addition, you could place ads saying that you are looking to buy a triplex or duplex house for investment.
Direct mail – This involves sending letters directly to property owners hoping that some of them are ready to sell.
Networking – You can network with real estate investors at open houses, seminars or local real estate meetups. Online forums are another great way of engaging with landlords.
Driving for dollars – This simply refers to driving around neighborhoods while looking out for For Sale By Owner (FSBO) boards or signs of distressed investment property.
Property finder tool – This tool by Mashvisor helps investors find owner occupied rental properties based on their search criteria and preferences. The property finder uses a wide range of metrics, analytics, and data comps to offer users lists of properties with a high return on investment. After selecting the city you are interested in, set a radius for your investment property search. You can then search for suitable investment properties using filters such as budget, rental strategy, number of bedrooms, and number of bathrooms. Be sure to set the “Multi Family” filter to ensure you’re looking at multi unit properties. The results will show the property’s cap rate, cash on cash return, and listing price. You can click on a property card to see a full real estate investment analysis of any property as well.

making money with an owner occupied rental

Mashvisor’s Property Finder Tool

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3. Get Financing

An owner occupied rental property mortgage usually comes with lower interest rates and a lower down payment compared to financing for a single family home. Here are some of the financing options available for owner occupied multi family homes:

VA (veteran affairs) loans – If you or your spouse is a former or current member of the military, you are eligible for a VA loan. Such loans require no down payment or a minimum credit score. In addition, they come with easier qualification requirements and lower closing costs.
FHA loans – This loan comes with low down payment requirements (only 3.5%), low interest rates and very strict eligibility criteria. Even if your credit score is below average, you might still qualify for an FHA loan
Conventional loans – The size of your property will determine the maximum loan amount offered. The lender will look at your payment/credit history, debts, income, and credit score.

4. Make an Offer

Once financing is sorted out, it is time to make an offer on an owner occupied rental. At this point, it would be advisable to engage the services of a real estate agent. An experienced agent can help you negotiate with the seller and strike a good deal. When there is a mutual agreement, take time to inspect the property to see what needs to be fixed. After inspection, you can re-negotiate with the seller based on the repairs that need to be done.

5. Close on the Property

Depending on your location, you can close at an attorney’s office or a title company. Your real estate agent will provide assistance with any legal issues and paperwork for your owner occupied rental.

6. Rent the Unit(s) Out

If you don’t want to manage the property yourself, you can hire a professional property manager. Their responsibilities include showing the property to potential renters, outlining occupancy terms, collecting monthly rent, and advising on owner occupied rental laws. In addition, they hire and assign duties to workers and contract services such as landscaping and trash removal. Property managers also maintain property records and prepare financial reports for owners.

With these 6 steps, you can start making money with an owner occupied rental. Keep in mind the pros and cons of this real estate investment strategy and work to eventually move out and rent the whole property for maximum income!

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