Should You Live in Your Rental Property? Multi-Family Investment Tips
Investing in real estate can have a steep learning curve at times. It can, however, be well worth the time spent learning the ins and outs of the process. People often ask whether it's a good idea to live in a multi-family investment property that they own. There are some advantages and disadvantages to living in a rental property as one's primary residence. Keep reading to learn whether living in your multi-family home is a good choice for you.
Pros of Living in Your Investment Property
Landlords who like to be more hands-on with their property, whether that means keeping a closer eye on the place or having closer relationships with renters, will probably do well with a live-in situation. Living in an investment property can also simplify the owner's mortgage payments. If the right conditions are met, there are even some specific financial benefits to owner occupancy.
Simpler Mortgage Payments
Living in one of the units of a multi-family property simplifies the mortgage payment process for the landlord. Since the owner's primary residence and the investment property are the same, the owner is only dealing with one mortgage payment.
This strategy also means that rent from the tenants is paid towards the owner's mortgage. If structured correctly, a multi-family property owner can reduce their mortgage payment by as much as 50 percent when compared to the mortgage they would be paying on a single-family home. However, the property usually has to be at least a triplex in size for this to work.
Easy Access to Tenants
Some owners enjoy the prospect of being a landlord. Living on-site in one of the units makes property management that much easier. The landlord/owner is there to keep an eye on the property most of the time and is quickly available in case an emergency repair is needed. Since they're close to their tenants, owner-occupants can collect rent on time, and never need to worry about their rental property's condition because they live there full time.
If someone is new to investing in real estate, moving into one of the units can be an excellent way to figure out whether they want to be a landlord. Real estate investments often lead to making bigger property purchases with even more units. Living on-site in an initial property can help the owner decide if they have the qualities to be a landlord for a more extensive property or if they should hire a property management company.
Financial Benefits of Owner Occupancy
Owner-occupants are able to get a better deal on a mortgage. Banks are often willing to provide a lower interest rate when the owner plans to live on-site. Down payments are also lower, and the required personal guarantees on the deal are less rigorous.
And since the owner gets such a great financial deal, they can usually afford a much larger mortgage. If the owner plans to live off-site, banks can require a down payment of as much as 25 percent. The down payment can be reduced to as little as 3 percent for owner-occupants. This can represent tens of thousands of dollars in up-front costs.
One additional financial benefit was already mentioned earlier. Tenants are paying toward the owner's mortgage, so the owner-occupant's mortgage obligation can be significantly lower.
Cons of Living in Your Investment Property
Those were some of the benefits of living in a multi-family investment property. But what are the downsides? For one thing, an owner-occupant's tax situation can become much more complex. And that easy access that an on-site landlord has to their tenants works both ways. Here's a closer look at why being an owner-occupant might not be the first choice of some investors.
Taxes Can Become More Complicated
The complications of an owner-occupant's taxes start with the separation of personal versus business expenses. For tax purposes, the owner's residence is treated like any other primary residence, and costs for a personal residence are not deductible. However, any costs incurred on the other rental units are deductible. Keep good track of these!
The portions of the property that the owner does not occupy can also be depreciated over time, though in some cases, this may be good for a real estate investor.
Repairs add another layer of complexity. The owner-occupant cannot deduct repairs for their personal residence. Repairs made to common areas, such as a shared driveway, can be partially deducted. Any repairs made to the portions of the property rented by others are fully deductible.
Easy Access Goes Both Ways
Being an on-site landlord is not a living situation that some people will enjoy. Just as the on-site landlord has easy access to the tenants, the tenants have easy access to the landlord. Some tenants can be pushy and like to constantly bring every tiny grievance to their landlord. This can create a strained landlord-tenant relationship if the owner is not prepared.
There is also an unwritten agreement in every landlord-tenant relationship. Owner-occupants are expected to abide by the same rules as the tenants. For example, a landlord shouldn't use an on-site laundry room during hours when tenants are restricted from using it. This will be viewed as hypocrisy, no matter the owner's intent. Be prepared to live by the same rules as the tenants.
Multi-Family Rentals Are a Great Starter Investment
As long as a person has the right temperament to be an on-site landlord, a multi-family property can be a great way to get into real estate investing. The main thing before getting started is to understand all the pros and cons of living in a rental property and using it as a primary residence so that they're prepared.
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