Owner Occupant Investment Property
by Peter Krzyzanowski
We talk to people everyday that tell us they are sick of paying rent, but aren’t yet ready to commit to buying a property for themselves. That commitment is a concern when there are uncertainties in someone’s future. In Chicago, if someone will be in the city for 3 years they are usually better off buying their home than renting it… but what if they MAY be here, but they MAY also pursue an opportunity somewhere else? What if their job isn’t as stable, or they are thinking of going back to school, or they don’t have a lot of money saved for a down payment, or they aren’t making as much now as they might be in the future? There are plenty of valid reasons someone might not be excited about owning property. All of those reasons come from looking at owning property as a liability. In many cases, that’s valid… you have a monthly payment due every single month and it’s not as easy to move as just leaving at the end of a lease or subletting. We get it!
But… what if… we look at it another way? Instead of looking at the property as a liability, we look at it as an asset. What’s the difference? An asset brings money to your pocket… a liability takes it out. Rent is a liability, just like a mortgage payment. Turning your future home from a liability to an asset is the key. So how do we do that for our clients? As with most things that seem complicated at first, it’s usually just a matter of providing some education and breaking it down to understand how it all works.. We’ve helped several clients over the past few years turn their home in to an asset that helps pay for itself. We didn’t go in and rebuild people’s homes… we help them buy owner-occupied multi-unit properties… one building that has between 2-4 units. They live in one and rent out the other(s). These buyers are thrilled with their decisions. They tell us that they now own a property and are paying out only $500-1000 per month because of the rental income from the other units. Once they are ready to move on to a different home (or city) that property becomes an asset, paying for itself (and usually more) through rental income.
There are a few key items that give owner-occupant buyers a leg up… first off, they get a lower interest rate than a traditional investor might on the same property. Banks like to see people living in the homes they finance because owners generally take better care of their properties. Owner-occupant investors get to enjoy that lower rate for all 30 years of the loan, whether they live there or not (as long as they plan to live there for a year). Second, owners that occupy their properties don’t need to have as large of a down payment as investors buying the same building. Because banks see less risk with owner-occupants, they can buy a property with as little as 3.5% down payment on an FHA loan. Compare that to a traditional investor that needs a 25-30% down payment. Third, owner-occupant investors are better prepared to weather any changes in the real estate market than traditional home buyers because they have other people’s income to help pay the mortgage. Where a traditional buyer may have 1 or 2 incomes to support the mortgage payment. The owner-occupant investor may have 4-10 (depending on number of units) incomes to support their mortgage payments. It’s possible that 1 or 2 people lose their income, but highly unlikely that all 8 people living in a 4 unit building will lose their incomes. That’s diversifying! The fourth and final reason, is that real estate is really the only leveraged investment that is available to the average person. Leverage means that while only paying a small portion of the total cost of an asset, the average person can participate in 100% of the income and appreciation of that asset.
So if owner-occupant investors are better off than traditional investors AND traditional owner-occupants, why doesn’t everyone do this? We’ve said it before and we’ll say it again… it’s simply a matter of education. They don’t have a real estate advisor who has been through this personally, understands their concerns, and can teach them about all of it so they can make the best decision for themselves.
Call us at 312-667-3800 if you’d like to learn more about this.