{"id":82530,"date":"2016-11-14T15:45:44","date_gmt":"2016-11-14T22:45:44","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=82530"},"modified":"2024-02-23T16:16:28","modified_gmt":"2024-02-23T23:16:28","slug":"owner-occupied-financing","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/owner-occupied-financing","title":{"rendered":"How to Grow Your Income Property Portfolio with Owner-Occupied Financing"},"content":{"rendered":"<p>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\u2019t mind moving every so often, this is a great way to supplement other acquisition efforts and leverage more favorable financing terms along the way.<\/p>\n<p>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.<\/p>\n<p>You also have a lot more down payment flexibility when financing owner-occupied. These days, most lenders require a minimum of 20% down &#8212; and more frequently 25% &#8212; 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.<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/guides\/buy-and-hold-rental-property?itm_source=ibl&amp;itm_medium=blogad&amp;itm_campaign=guide\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-126305\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/Buy-and-hold-Blog-Ad.jpg\" alt=\"buy and hold guide ad\" width=\"706\" height=\"125\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/Buy-and-hold-Blog-Ad.jpg 706w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/Buy-and-hold-Blog-Ad-300x53.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/Buy-and-hold-Blog-Ad-702x125.jpg 702w\" sizes=\"auto, (max-width: 706px) 100vw, 706px\" \/><\/a><\/p>\n<p><em>Ready to invest in rental property? BiggerPockets&#8217;s <a href=\"https:\/\/www.biggerpockets.com\/guides\/buy-and-hold-rental-property?itm_source=ibl&amp;itm_medium=blogad&amp;itm_campaign=guide\" target=\"_blank\">guide to the buy and hold strategy<\/a> will teach you how to analyze rental markets, budget for your investment, choose the best property, and finance your purchase. Ready to start investing in rental property? Here&#8217;s how.<\/em><\/p>\n<p>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\u2019ll explain more later.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-82271\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/get-preapproved.jpg\" alt=\"get-preapproved\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/get-preapproved.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/11\/get-preapproved-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><br \/>\n<em><br \/>\n<strong>Related: <\/strong><a href=\"\/renewsblog\/finance-your-first-deal\" target=\"_blank\">The Comprehensive Guide for Financing Your Very First Real Estate Deal<\/a><\/em><\/p>\n<h2>Financing Considerations to Keep in Mind<\/h2>\n<p>If you\u2019re 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:<\/p>\n<ul>\n<li>If you\u2019re 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.<\/li>\n<li>If you\u2019re 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.<\/li>\n<\/ul>\n<p>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\u2019re buying right in the first place, you should always have a healthy equity position in the property.<\/p>\n<p>Lenders usually like to verify rental income via filed tax returns, but income for a newly converted property probably won\u2019t show up on your returns quite yet. To document the new rental income, you\u2019ll 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.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-81121\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/09\/tenant-screening-tips.jpg\" alt=\"tenant-screening-tips\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<p><em><strong>Related:<\/strong> <a href=\"\/renewsblog\/creative-financing\" target=\"_blank\">Creative Financing: 5 Outside-the-Box Tools Savvy Investors Use to Build Wealth<\/a><\/em><\/p>\n<p>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\u2019re 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.<\/p>\n<p>However, if you\u2019re taking out a bank loan on an owner-occupied property, the limits don\u2019t apply. If you\u2019re 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?<\/p>\n<h2>Conclusion<\/h2>\n<p>If you\u2019re thinking that moving on a regular basis is a pain in the neck, I\u2019m with you. I\u2019m not a huge fan of moving, that\u2019s 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\u2019re single or married without kids, this might be a great way to build your portfolio until you need to be more established and permanent.<\/p>\n<p>Employing a strategy of acquiring new homes and renting the old ones allows you to take advantage of the best bank financing terms &#8212; which helps maximize cash flow and ROI &#8212; and you can avoid the annoying Fannie Mae limit on the number of financed properties you can own.<\/p>\n<p><em>Note:<\/em> 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.<\/p>\n<p><em>Do you use owner-occupied\u00a0financing? Any questions or comments about this\u00a0method of financing?<\/em><\/p>\n<p><strong>Let me know with a comment!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you&#8217;re in the position to take advantage of it, owner-occupied financing can be an incredible way to build your portfolio. Here&#8217;s how.<\/p>\n","protected":false},"author":1574,"featured_media":82548,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4241],"tags":[],"class_list":["post-82530","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-business-management"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/82530","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1574"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=82530"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/82530\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/82548"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=82530"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=82530"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=82530"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}