Owner occupied loans are characterized by unique benefits. For borrowers that are looking to break into the real estate investment market, this is a possible great opportunity to gain a head-start in an ever-changing market. However, as with all loan situations, owner occupied loans can either be incredibly beneficial, or if used improperly a drawback for the borrower. For those considering this form of financing, we are here to provide you with the top benefits, and drawbacks, of borrowing within an owner-occupied loan.
What is an Owner Occupied Loan?
Before getting into the benefits and drawbacks of an owner occupied loan, we are going to outline what constitutes an owner occupied loan. In most cases, the property needs to reside in the property for the majority of the year. Second homes, vacation homes, and homes given to other benefactors. Oftentimes this means residing in the property for no less than 70% of the year, working within a 50 mile radius, and signing documentation that you will stay in the home for at least a year. If these stipulations are something you can follow, an owner occupied loan is one that may work for you.
Top Benefits of Owner Occupied Loans:
- Easier Access: For borrowers looking to obtain a hard money loan, investors are often more willing to invest in those who are pursuing owner-occupied properties. Living in the property for the year, while also maintaining the property often means investors will support these loans versus other financing options.
- Lower Capital Gains Tax: After 12 months of living on the property, the owner of the property may be able to secure lower capital gains tax. This is due to the fact that the owner has to be the primary resider of the property. This may be a lower tax rate than those who finance real estate solely as an investment.
- Possible Homestead Exemption on Property Taxes: As a primary residence, owner occupied loans may qualify for homestead exemption. Homestead exemption can protect against creditors and safeguard primary residency. However, this does not always apply as banks can secure the property if the owner is to default on their mortgage.
- Property Tax Deductibility: Property tax deduction is possible for primary residency. Depending on the state, you could be the benefactor of property tax deduction, opening up cash flow for other real estate ventures.
Drawbacks of Owner Occupied Loans:
- Renter Hardships: For borrowers who are trying their hand at being first-time landlords, there is an adjustment for this role. For instance, you may have a harder time finding renters as they may not want to live with their landlord. Along with this, any negative relationships with renters may carry into home life as the landlord is in close contact with renters.
- On-going Cost: As the primary resider and possible landlord of the property, costs incurred due to repairs or general upkeep often fall upon the borrower. This contributes to the property being less about passive income, and rather a prolonged investment.
- Fielding Complaints: As you will be in close proximity with tenants, you will not be able to avoid potential problems or complaints with the renters.
- Less Flexibility: As you are required to make the property your primary residence, you may experience less flexibility in terms of moving or living situations. As most require you to be a resident on site for a year, this is a factor that needs to be taken into consideration before signing any contract. Attempting to get out of this contract can be considered mortgage fraud, which is a serious thing to consider.
Bottom Line:
An owner-occupied loan can be a great investment opportunity for those who are aware of the stipulations of this financing option. Real estate investors may consider owner-occupied loans as a solid, foundational way to break into the real estate market. Finding a trusted investor is also key as you begin your real estate investment journey. But you don’t have to make that journey alone. At JMJ Funding, it is our job to help you!
