Being the owner occupier of a real estate property as opposed to renting it out or renovating it with the purpose of reselling it confers various potential benefits. Among the most favorable are lower down payment requirements, lower interest rates, and access to loans or government programs that are only available to owner occupiers.
Those benefits make it advantageous for investors to consider becoming owner occupiers if only for the minimum amount of time necessary to abide by the rules says William S. White Winnetka, who received a Juris Doctorate and an MBA in Finance from Columbia University before embarking on a successful career in finance and real estate investment.
Those rules state that owner occupiers must be living in the home within 60 days of the sale closing and continue to live there for at least 12 months. After that, they are free to convert the home into a rental property or put it back on the market.
While these rules clearly benefit investors willing to occupy the property for a year, they can also be detrimental in some respects.
Finding the Balance in Owner-Occupied Investment Properties
Most notably, owner occupiers may be tempted to place greater emphasis on their own personal living preferences as opposed to seeking out properties that make the most sense as a future investment for renting.
This is especially the case when it comes to properties that need to be renovated according to William S. White Winnetka, who states that owner occupiers must always be living in the house during that initial one-year period. That applies even when the home renovations could potentially pose health risks to the homeowners.
Investors may be far less willing to occupy a home that requires extensive work, regardless of whether they plan to begin renovations on it within the one-year period.
While that particular scenario is understandable, the principle extends far beyond just living in run-down homes and could apply to relatively benign features of the property such as its location, yard space, whether it has a swimming pool or fireplace, or its proximity to nearby amenities or the owner occupier’s workplace or other frequented locations.
In all those cases, the homeowner may be tempted to put their own comfort for that one-year stay above their future returns on the property, which could be a big mistake in the long run.
Building a Diversified Real Estate Portfolio
This is particularly true if the potential owner occupier needs or wants to live in an area that doesn’t have the same housing market growth potential as more far-flung locations that would make for much sounder long-term investments.
These include regions that are experiencing strong population and jobs growth, and which have young populations that will be clamoring for homes in the near future. Atlanta, Columbus, Salt Lake City, Austin, Las Vegas, Kansas City, and San Diego are among the hottest housing markets with great potential for strong home price appreciation in the years to come.
The real estate portfolio of an owner occupier that is willing to briefly live in distant areas will not only have much greater growth potential, but will also be far more diversified, protecting them against future downturns in a single market.
In fact, William S. White Winnetka recommends that investors who can’t build a diversified real estate portfolio in this way may be better off avoiding the owner occupier route altogether. While that will require putting down more money upfront and taking on less favorable loan terms, the long-term benefits of achieving more sizable returns and better diversification in their portfolios will outweigh those downsides.
The Most Important Metrics to Consider for Owner Occupiers
In addition to location, owner occupiers can calculate the potential value of their investment using several key metrics. The most important include the property’s gross rent multiplier, its cap rate, and its cash on cash return.
The gross rent multiplier divides the property’s market value by its estimated annual gross income to deliver a quick snapshot of its earnings potential in relation to its cost. It does not factor in other variables like operating expenses. Cap rate is a similar metric that replaces gross income with net income, while the cash on cash return divides the property’s pre-tax cash flow by the amount of cash invested in it thus far.
A good real estate investment calculator can help you easily crunch the numbers on these and other important metrics so you can judge the investment potential of a property and whether it makes more sense to purchase it as an owner occupier or an investor.
William S. White Winnetka concludes that although it may seem to be a large investment of both time and money to become an owner occupier, the benefits that come from the hard work are great.
