Mortgages & Creative Financing

How to Grow Your Income Property Portfolio with Owner-Occupied Financing

12 Articles Written

A great strategy for growing your residential (1 to 4 units) rental property portfolio over time is to regularly acquire new homes to live in and convert your old ones into rentals. Assuming you don't mind moving every so often, this is a great way to supplement other acquisition efforts and leverage more favorable financing terms along the way.

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The primary advantage of building your portfolio this way is that you can take advantage of more favorable owner-occupied financing terms. Interest rates on owner-occupied traditional bank mortgages tend to run an average of 1% to 1.5% lower than comparable investment property loans, which can add up to a lot of cash flow over time.

You also have a lot more down payment flexibility when financing owner-occupied. These days, most lenders require a minimum of 20% down — and more frequently 25% — for an investment property, but down payments on owner-occupied properties can be as little as 5% for a conventional loan and 3.5% for an FHA loan. Note: Putting down less than 20% will require you to pay mortgage insurance, but you do have the option of putting down less with an owner-occupied loan.

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One of the most confounding traditional bank financing issues for many investors is the Fannie Mae limit on the number of financed properties you can own. Believe it or not, this acquisition strategy can help you avoid it in many cases. I’ll explain more later.


Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal

Financing Considerations to Keep in Mind

If you're converting a primary residence to a rental and acquiring a new home, there are some considerations to keep in mind when qualifying for the new bank loan. The biggest issue for most people has to do with their debt-to-income ratios (DTI) because the lender will want to make sure you can handle the old loan and the new loan. You can use the new rental income to offset the ding of the new mortgage to your DTI, but with certain limitations:

  • If you're converting a one-unit property to a rental, you must have at least a 30% equity position in the existing property to use the new rental income.
  • If you’re converting a 2 to 4-unit property, you must have at least a 30% equity position in the existing property to use the new rental income from the unit you previously occupied. You can use the income from the other units regardless of your equity position.

One way you can make sure you have always have this kind of equity position in each home you purchase is to avoid buying at a retail price point. Many investors already have a business buying fixer properties, rehabbing them, and reselling to an end buyer. Why not do the same for yourself? Buy a fixer, rehab it, then move in yourself. If you’re buying right in the first place, you should always have a healthy equity position in the property.

Lenders usually like to verify rental income via filed tax returns, but income for a newly converted property probably won't show up on your returns quite yet. To document the new rental income, you'll likely be asked to provide a fully executed lease agreement and a bank statement documenting the security deposit. To account for maintenance, repairs, and vacancies, the lender will use 75% of the gross rental income for qualifying purposes.


Related: Creative Financing: 5 Outside-the-Box Tools Savvy Investors Use to Build Wealth

Another big advantage of expanding your portfolio by regularly converting your homes to rentals is that it gets you around the often sticky limits on financed properties. When you’re taking out a bank loan on an investment property, Fannie Mae guidelines only allow you to have up to 10 financed residential properties. Practically speaking, the limit is often more like 4 because it can be hard to find a bank that will finance properties 5 through 10 even though Fannie allows for it.

However, if you’re taking out a bank loan on an owner-occupied property, the limits don’t apply. If you’re financing a property to move into, the whole number of financed properties issue is completely moot. You can have as many financed properties as you like! Pretty cool, huh?


If you’re thinking that moving on a regular basis is a pain in the neck, I’m with you. I’m not a huge fan of moving, that’s for sure! However, would adding another cash flowing property to your portfolio help ease the pain of packing and unpacking all your stuff? If you have a family with a few kids, this might not be worth the trouble, but if you’re single or married without kids, this might be a great way to build your portfolio until you need to be more established and permanent.

Employing a strategy of acquiring new homes and renting the old ones allows you to take advantage of the best bank financing terms — which helps maximize cash flow and ROI — and you can avoid the annoying Fannie Mae limit on the number of financed properties you can own.

Note: Guidelines can change at any time, so be sure to check with a qualified mortgage professional for current guidelines and qualifying information specific to your particular situation.

Do you use owner-occupied financing? Any questions or comments about this method of financing?

Let me know with a comment!

Mark Fitzpatrick is a Senior Loan Consultant with Lenox Financial Mortgage Corporation based in Irvine, Calif. I specialize in helping families and real estate investors reach their real estate goa...
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    Ewa Reza from Los Angeles, California
    Replied almost 4 years ago
    2-4 unit properties bought as owner occupied are in my opinion the best way to break into real estate investing. Good post Mark!
    Ryan Dossey Real Estate Broker from Indianapolis, IN
    Replied almost 4 years ago
    Mark I’m curious how you pitch this to owners and in what instances you find the sellers are most likely to accept it. We often make “multi” style offers. A) Cash. B) Short term carry C) Long term carry with a DP. Also this would need to be done with properties owned free/clear correct? Otherwise you’re likely violating the DOS clause.
    Jarred Sleeth Lender from Austin, TX
    Replied almost 4 years ago
    Ryan, I don’t believe he’s talking about “Owner Financing.” He’s just mentioning the benefits of buying a new home to live in with a traditional mortgage and converting the old home to a rental.
    Ryan Dossey Real Estate Broker from Indianapolis, IN
    Replied almost 4 years ago
    Mark F. Investor from Orange County, CA
    Replied almost 4 years ago
    This is a great strategy to use, but it’s important to realize that banks will likely scrutinize you. If you’re legitimately moving up into a better home or moving closer to a new job, etc., the bank shouldn’t give you a hard time if you plan to buy a new home and convert the old one into a rental. If you’re obviously just trying to grow your rental portfolio by living in a property for a little while to say it’s “owner-occupied”, the lenders may give you some push back. Also, this doesn’t work if you’re using mainly FHA financing. You’re only allowed to have one FHA loan at a time.
    Julie Marquez Investor from Seattle, WA
    Replied almost 4 years ago
    I like this idea of buying rentals, it has worked for me in the past and I continue to use it (very slowly though).
    Account Closed Investor from Charlotte, North Carolina
    Replied almost 4 years ago
    My wife and I used the owner occupied purchase twice this year. The first purchase was a duplex financed in my name and the second was a single family that needs a lot of work financed in my wife’s name. We are going thru the rehab ourselves. We are turning the basement into an apartment so every property we own will be income producing.
    Michael Strobel Investor from Lynchburg, VA
    Replied over 3 years ago
    Mark, Just did my first owner occupy investment property last July. Looking for the next property. Id really like to get into a triplex or 4 plex for my next property. I had no idea that owner occupy loans dont count toward your fannie mae freddie mac loan limits. So does that mean if I did an owner occupy loan (specifically VA loan) doesnt count toward future loans? This would be great news if thats the case? Anywhere where I can find out more about that?
    Colt Taylor from Palm Bay, Florida
    Replied over 3 years ago
    Thanks Mark! This article answers many of the top questions which brought me to BP. There is a lot more meat on these bones though. I wish you had covered the liability angle that OO financing usually leads to you future properties being owned in your own name. Also, the follow up issue that if you try to quick deed the property into an LLC to solve those liability issues, that might cause the mortgage to become immediately due. I wish there was a single article or book which covered every aspect of this OO/Nomad purchasing strategy. One question for the current material… As each mortgage’s owner-occupy clause expires and you are pursuing a mortgage for your next property, presumably you are still living in the current property. It is not yet a rental so it is generating no rental income, and there are no lease documents or tax returns showing the yet to be realized rental income. You are therefore attempting to buy the next house based purely on your credit and income. This seems like the normal state of business, even for buyers who are not building a rental portfolio. But… how should this influence my buying decisions for the first house? Should I buy and move into a house which uses 50% or less of my buying potential, so that I will qualify a year later for the second similarly priced home? If that is the case, where do I find that mystery number. What does the bank think my buying potential is? Thanks again for a great article!
    Anastastia Disbrow
    Replied about 2 years ago
    Hi Mark, I purchased my rental property with owner occupied and now I’d like to refinance my loan for a better interest rate, however I don’t like the any more. Will I have any issues with my lender if I don’t technically love the anymore? Thanks in advance!
    Michael Pommier Flipper from New Iberia, Louisiana
    Replied almost 2 years ago
    Anybody using land contracts in Louisiana
    Jordan Jackson Rental Property Investor from Minneapolis, MN
    Replied 2 months ago
    Hey mark, Looking for some answers on how you first structured your business as an owner occupant. With an FHA or owner occupant loan, the home is not owned by a business, but you personally. My question is how did you set up your bank accounts and paperwork (lease agreements, move in-move out terms) etc? Who are/were your tenants making out their checks to?