Any savvy investor knows that having a passive income is just as important as having an active one. While your active income requires you to give time and effort to make money, your passive income generates money without dedicating much of your time to make it.
Investing in rental real estate property, though, stands in the gray area between passive and active income. Before you can generate income from rents, you need to give time and effort to managing your property. Not to mention, you have to spend some cash on it.
When you rent out your property, you have options to either live away from your property or occupy the same, making it an owner-occupied property. If you have considered doing the latter, you might want to find out the pros and cons of this type of arrangement. But first, let us learn more about an owner-occupied property.
What Is an Owner-Occupied Property
Owner-occupied property is a type of investment property wherein the property owner rents out the property while also living within the premises. A good example of this setup is the Victorian homes in major cities such as New York and San Francisco, divided into apartment units over the years.
Most of the time, owners of these rental properties live in one of the units. Determining whether a rental property owner is an owner-occupant or an absentee landlord is important for several reasons, including an application for an FHA loan and refinancing.
Now, let us go ahead and find out the pros and cons of an owner-occupied property.
Advantages of Owner-Occupied Property
Higher Quality Occupants
One of the major benefits of owner-occupied rental property is that it usually attracts higher quality tenants. Owners do not want to live next to or near bad neighbors, so they naturally tend to be selective about who they accept as renters. Moreover, renters who tend to behave poorly opt to rent a property located as far away as possible from the landlord.
Lower Management and Maintenance Costs
When the owner lives in the rental property, management costs are significantly reduced since the property owner no longer needs to hire a manager or management company. This helps save about 5 to 10 percent of the gross rent. Furthermore, the property owner can handle a portion of the building’s maintenance needs.
Property owners who live in their rental properties enjoy certain tax benefits and exemptions. For one, they can write off their rental expenses against their rental income. They can also write off depreciation on their property’s rented parts, allowing owner-occupiers to save hundreds of dollars in a year.
Compared to rental properties with absentee landlords, owner-occupied rentals have leverage when it comes to financing. Owner-occupiers can easily get loans approved by banks and mortgage companies since they have more confidence that you can have the repayment capacity.
Disadvantages of Owner-Occupied Property
Tenants Reluctant to be Around Landlord
Tenant-landlord relationships are complex ones. Although landlords have the right to ensure that their investment is being looked after, tenants would appreciate that they are given a certain degree of privacy without the owners watching their every move. Because of this, some potential renters are reluctant to rent a space in a place where the landlord also resides.
Added Ongoing Costs
One huge concern of owner-occupied rental property is the expenses related to repairs and maintenance. Unlike rental properties with absent landlords who can shift the burden of maintenance and upkeep to tenants, owner-occupiers must take care of such expenses.
Noise and Complaints
Another disadvantage of being an owner-occupier is the constant complaints of your tenants. Although you can easily respond to any complaints that may arise, there might come a point where you become inundated with such. And it might also come to a point where your tenants would bother you with even the minutest issue, which they could have resolved themselves.
Since you live within the premises, chances are your privacy might be infringed upon. Tenants are more likely to complain to you even outside designated hours. Thus, if you opt for an owner-occupier rental arrangement, you must mentally prepare yourself that your evenings might be interrupted.
Should You be an Owner-Occupier?
Opting for an owner-occupier rental arrangement is a good investment strategy, but it could backfire as well. If you have made up your mind to take this route, you have to ensure that you know what you are getting into — that you have to give up a certain degree of privacy and freedom. But on the upside, you get to enjoy huge housing-related savings on top of a steady stream of income.