The Owner Occupied Advantage

The Owner Occupied Advantage


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In case you haven’t gotten the drift of this blog yet, let me spell it out: real estate has a lot of ways to make good money. Real estate is the beating heart of capitalism, and is one of the most (possibly THE most!) powerful way to generate wealth in a capitalist society… and the federal government really wants you to get into the game!

To encourage that there are programs, such as the Federal Housing Administration, that give aid to people working on a very particular type of real estate deal: their own home. What the FHA does it provide insurance, paid for by the borrower, to the lender for providing unusually large loans against real estate that the lender would otherwise not give. The downpayment on a home purchased with an FHA loan can be as low as 3.5% and some programs even provide assistance with that! The point of the FHA is to help people afford their first real estate deal; and if that first deal is their own house, there’s a good chance it will be their most lucrative too!

To illustrate the difference between owner occupied and a non owner occupied let’s compare two imaginary buy realistic scenarios. Imagine you are a landlord, You own a single family home that you rent out to a small family. You’re quite busy, so you hire a property manager to help take care of your tenants for you. The property manager is excellent and charges the very reasonable price of 10% of your gross rents to manage your property. The tenant family paid reliably for most of the year, but then they decide not to pay rent. Your manager reminds them very politely that not paying their rent really wasn’t an option you wanted to give them and issues an eviction notice. They don’t have a case, but they fight it anyway and you spend half a month’s rent on legal fees and lose 2 months rent while trying to get them out and get a new tenant in. It was a rough year, but thankfully you started out ahead and you still made a small profit… now the IRS wants a cut, 15%.

Now, instead let’s imagine that you occupy the property yourself: you are your own tenant. First of all, you don’t need a manager, because your tenant (you) would never sue you for anything, and the contracts you make with yourself are a breeze! 10% savings, right there. Secondly, your tenant (you) is a model of excellence, you treat the property just like you own the place, and you ALWAYS pay yourself on time (You do, right?) 20% savings on a legal fee and 2 months rent! Finally, all of the “income” was in the form of savings, so none of it, not a dime, is taxable; you don’t even have to report it at all. Then, when you sell the home (if you sell it) if you lived there for 2 years, you don’t have to pay taxes then either!

Do you think maybe the improvement to your finances might be more in the second scenario, where you aren’t dealing with the problems of the professional investor? Now, if professional investors can make the first scenario profitable, a typical homeowner should be able to make the second work too. A home that costs a professional investor $1,000/mo to own could easily cost an owner-occupant only $700/mo. That’s the owner-occupied advantage. See you next week!

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