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Owner Occupied Investment Properties

Monday, May 18, 2020   /   by AJ Shepard

Owner Occupied Investment Properties



Speaker 1:

[inaudible 00:00:01] Computer, present, here you go sir.

Trent Werner:

All right. Owner-occupied investments with myself. What is an owner-occupied investment? It's a property that you purchase, live in, and also use as a rental; whether it's single bedrooms or whatever it may be- [crosstalk 00:00:23] that can be a single-family house that you rent out rooms individually. It can also be a 2 to 4 unit property that you live in one of the units and rent out the other one, two, or three units to tenants.

Speaker 1:

[crosstalk 00:00:40] Four units?

Trent Werner:

No, because, I mean it could theoretically but you'd still have to go through commercial financing if it's above four units. So 2 to 4 units is the sweet spot where you can still get normal residential financing on the property and still occupy one of the units. I guess you could live in a 10 unit. But like I said, you're not going to get the benefits that I'll talk about in the next slide.

Speaker 1:

Cool.

Trent Werner:

So why would anyone want to owner-occupy? It's a great way to start your investment portfolio. When your owner occupies a property, you have to live in it for a minimum of one year according to the lender requirements and then you can turn it into a rental. So if you have an FHA loan or whatever type of loan program you have, if you're buying it as a primary residence, you have to live in that residence for one year and then you can move on to the next one. So it's a good way to put 10% down on an investment property, live in it for a year, and then when you move out, turn that into a rental property without having to put 25% down upfront. And that kind of ties into my next point where you get a better interest rate.

Trent Werner:

So, like I was talking about with Tanner, 2 to 4 unit, you could still get residential loan programs for them and you can put as little as 3.5% down with a little bit lower interest rate because typically commercial financing has a higher interest rate or there are more points that you have to pay for upfront, and usually, it requires 25% down or more for a commercial loan. Whereas like I said, with the residential loan program, you can put 3.5% down and still get into the property.

Trent Werner:

Owner-occupied, if there's a value-add potential, especially the unit that you are living in where you can work on it over that year that you're living there and make that unit nicer, you can increase the value of the property as a whole. And I'll talk about that a little bit more on the next slide.

Trent Werner:

Another benefit of owner occupying is if you have tenants paying you monthly rent revenue that helps offset your expenses on a monthly basis. Like for example, my wife and I have a duplex that we owner-occupy, and $1,750 a month is coming in from the tenants. And so that helps cut down our loan payment pretty drastically.

Trent Werner:

In some cases, you can actually have those other units and other tenants cover your entire expense and live for free or make money while you're still living in that property.

Trent Werner:

And then it's another additional revenue stream. So when you're going to qualify for loans, I know they just changed it, but you can use the rental income as income for qualifying purposes. And if you have done this in the past and you have at least one year of landlord experience, you can use the new property that you're going to buy's revenue to qualify as income for your qualifying income as well.

Trent Werner:

So here is what the unit that we live in looks like. Well, that's the other guy's furniture. But-

Speaker 1:

So-

Trent Werner:

Yeah.

Speaker 1:

Before you had this slide so that rental income that you do receive, how does that get taxed when you're looking into buying anew?

Trent Werner:

I believe it's taxed as capital gains, but that's a great question for like a tax accountant. I know, so if you do have the one year experience now that they require and you go to buy anew, let's say you're buying a fourplex, each unit rents out for a thousand bucks a month. So that's 4,000 total for the property. But you're going to live in one of the units. So that's 3,000. You can use 75% of that as a qualifying income to buy the property.

Trent Werner:

So you'd be able to use whatever, 75% of 3,000 [inaudible 00:04:44] I think it's 2250 it is 2250 but yeah, so this is, I'm talking about the value add because obviously this unit was completely renovated when we bought the place. There's not a whole lot we can do to increase the value of the unit we live in. It's fully renovated so there's not a whole lot of room to improve that. But then if you look at our other unit, this is what it looked like in 2012 it actually looked like this up until about five months ago. Very 1970s. Hadn't been renovated, hadn't really been touched.

Trent Werner:

I think there's new blinds or something, but nothing crazy. Still looked like this in 20, up until about the end of 2019 and then our tenants moved out. So my wife and I renovated the place.

Trent Werner:

We put new flooring in, new paint, new fixtures, redid the bathroom, which isn't on here, but I'm just showing side by side. So, I mean that's what it was up until about, like I said, five or six months ago. And then that's what it looks like now.

Trent Werner:

We didn't do new cabinets or new countertops. We refinished countertops. So, I mean for a pretty affordable budget, I would say doing it by ourselves, we increased the value of the property a pretty good amount just from some cosmetic updates.

Speaker 1:

So if you were to buy a triplex and two of them are updated and one of them wasn't, what would you recommend moving into? Would you move into one of the updated ones or the not updated ones?

Trent Werner:

I would move into the not updated one because you can do that while you live there and also you'll be able to charge a higher monthly rental rate for updated units versus something that hasn't been updated.

Trent Werner:

So I would recommend that we- I mean our unit was vacant because the owner-occupied it before we bought it. And so this was already vacant, easy to move into. We didn't have to evict tenants or relocate tenants. So we just kind of moved our stuff in and that was that. And then like I said, once these tenants moved out, instead of just re-renting it in its current state because honestly we couldn't, it was just trashed. We had to do some updates and renovate the property a little bit. And so we just decided to do a good renovation on it now. And then that way we can charge a higher rental rate, which I mean we increased the rental rate by $150 a month. So as we were just talking about before we started recording this, that's a good chunk of value add to the property.

Speaker 1:

So about 30,000?

Trent Werner:

Yeah.

Speaker 1:

Cool.

Trent Werner:

But yeah, that's why I highly recommend owner-``occupying, especially your first investment property as you can start your portfolio with less money down originally and then you can, when it comes time you can use the income from these units that you owned in the past to qualify for more on the next property.

Trent Werner:

A little quick summary: owner-occupying is a great way to start investing. If you can find a value-add situation where you can add value when you lived there over time, that's going to reap the benefits in the long run and it's less money down and you get a better interest rate if you stay under four units when you're looking at these owner-occupied investments. Any questions?

Speaker 3:

So when you're original, in my case, for example, when you originally apply for a loan to buy that, you can use the potential rent for your income, technically, right? Your future rental income for a year?

Trent Werner:

Yeah. So it used to be that you didn't have to have any experience. We bought this place in 2018. We were allowed to use 75% of the rental revenue from the current lease that was in place, but now they changed it. So, you have to have one year of management experience, land-lording, owner-occupied investing, whatever it may be, in order to use that revenue that's at the property to qualify. So now if you were to buy a place now and you've never done it before, you'd have to qualify it outright to buy it. But then going forward you can use the property that you're looking at buying's revenue and qualifying up to 75% of that.

Speaker 3:

When did they make that?

Trent Werner:

It was in the last four months.

Speaker 3:

Oh wow.

Trent Werner:

I think it was at the beginning of the year or something, but Liz mentioned that in her vendor spiel at our January event. Yeah. That's owner-occupying 101, and I'm happy to talk more with anyone about it.

Uptown Properties
Chris Shepard
3526 SW Troy
Portland, OR 97219
503-941-0276
Fairway Independent Mortgage Corporation
Mike Maier
5410 SW Macadam Ave, Ste 100
Portland, OR 97239
503-545-9879

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