Advantages of first time buyer : Owner Occ plex as opposed to cash flow in out of area market

27 Replies

Advantages:

1.  choose your tenants  by owner occupying your duplex or 4 plex your not subject to the national discrimination rules.. You can choose your tenants ( hand pick them) discard any for any reason..

2. when you sell you get the owner occ 250 or 500k exclusion.. I know in non apprecating markets this may not be a consideration but in markets were values will move this will make up for years of cash flow in a non appreciating asset.

3. Owner Occ low down mortgage you can leverage into a very nice property for far less up front money. 

4. You can stay right on top of your asset since you live there. and since you hand picked your tenants you should have a pretty tight ship.. and not subject to PM and other risks associated with out of area rentals.

Anything else ?   any counter points to this argument ?

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Not a point or counter point, but a suggestion. This particularly applies when you live there, although I always apply it in my rentals. In my rentals, I am just The Manager.

Don't let tenants know you are the Owner. Just be another tenant-you can even gripe about "The Owner".

@Joseph Ball    by hand picking your tenants maybe that is not as necessary.. I hear ya though in a general sense.

When I was inspecting my portfolio before I sold it.. I would introduce my self as the insurance man.. If I said that I was the owner then of course the laundry list of complaints would come out..  Now this was C rentals and or what most folks buy in cash flow markets

My A rentals no issue there they all know I own it we self manage no problem... Although I am retiring from that aspect of the business as my homes come vacant they are sold.. Values are back up to an acceptable level and I want to take profit while its here to get...

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

It is 11PM, cold, rainy night.

Knock on door.

"My toilet just stopped up."

Sure you want that?  LOL. 

@Joseph Ball    if your going to have the Glory you have to handle the little stuff... 

by hand picking your tenant you should be able to mitigate those that plug up toilets poor grease down the sink... or kids that take crayons to the walls etc etc. 

If it was me I would have mature single employed females  who work for banks or other staid institutions  ... and or maybe if I was like many of the young guys here.. I would just default to only renting to strippers .. then a 11am knock on the door would not be so much of an intrusion  LOL

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jay Hinrichs , I'm totally with you on the advantages, and I think you know my first purchase was an owner-occupied 4plex w/ an FHA loan. So I'm on board!

ANOTHER HUGE ADVANTAGE:
FHA uses 75% of the non-owner unit rents to qualify you for the mortgage! Great way to up your price point through low downpayment, and your qualification through your tenants' payments!

But since you're asking for the

DISADVANTAGES:
1) Finding a place that you (and your significant other(s)) are comfortable living - many investors I know have a family, job in a particular area, school district etc where it might be a better investment or the numbers work better outside where they need/want to live. Make sure the others in your life are on-board..
2) Sharing Walls - If you're already an apt dweller, probably no big deal. But I've found people really don't like moving out of SFH into apartments
3) Some investors DON'T want ANY property management duties. They'd rather farm it out to someone else. And don't want to live next to their tenants..
4) Price points - can still be challenging in the Bay Area at least. And for FHA, I think they only go up to $1.2MM for 4pexes in high-cost areas like SF, Oakland, Peninsula. That already throw out most of the 4plexes in nice areas (over about $400/sqft..)

Do you know of low-downpayment owner occupied loans that are not FHA specifically on owner-occupied 4PLEXES? SFH is no problem, and some duplexes are lower, but had a tough time getting below 20-25% downpayment on owner-occ 4plexes, even in the Bay..

Again, having done the owner-occ 4plex for my first purchase, it worked great for me and laid the foundation of cash flow to grow my portfolio. And I plan to do it again sometime! Highly recommended! Just wanted to throw out some of the disadvantages too, although these didn't stop me for my circumstances..

I'll never say never to out of state, but to each their own, and for their circumstances..

Great post Jay! I think you're spot on!

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com

J. M. 

good points... I think the aspect of being exempt from the normal discrimination laws can mitigate the tenant issue to a large extent. But for someone who is starting out and has not lived in a SFH and is coming from an apartment this arrangement should not be that difficult. I can hear the gasp's all the way form Memphis about 1.2 million dollar 4 plex's LOL>

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

J. M. Would love to connect with you re: how you made owner-occupied 4-plex with FHA loan work in an expensive area (I assume this was in the Bay Area) since I am seriously considering making such a move in LA, Orange County, or San Diego.

Thanks for this post @Jay Hinrichs  , I've also been reading through the responses you had to Logan Allecs forum post on investing in a 2-4 unit in So Cal. I'm also looking to buy a 2-4 unit in the Seattle area so your posts have been really helpful. 

Could you clarify on getting rid of tenants for any reason- I was under the impression you still have to follow their lease unless you plan to live in the unit they are occupying, in which case you can get them out sooner then their lease ends. For owner occupied, could you potentially get rid of all tenants upon purchase regardless of existing lease terms?

@Cecilia P.  

  you cannot break the current leases without cause. .. what you can do when you owner occupy a 2 to 4 plex is you can choose your tenant ... you do not have to give a reason your turning anyone down.

So if you want to have your tenant neighbors be a certain type you can do that legally.. its the only instance that the fair housing laws on discrimination do not apply.

So in buying an existing 4 plex you just do not renew leases and you rent to the type of renter you want as your neighbor. pretty simple..   You have to follow the advertising fair housing laws.. but in tenant selection you can choose who you want... its a major advantage and one of the reasons owner occ plex's seem to work pretty nicely for the owners...

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Dawn Anastasi  

I get it Dawn for sure.. But remember you can buy a killer SFR in your town for a very reasonable amount of money.. this scenario is really not germane to most of the mid west. Its really meant for upper east coast and west coast were prices are 3 to 10 times higher than your markets for SFR's.. With the exception of Chicago were prices on the North side are equivilant to some of the WEst coasts and east coast best locations.

@?brieschmidt has some experience in the higher end plex's  although I don't think she has lived in one.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jay Hinrichs  ,

I wasn't even aware of an exemption from fair housing laws with an owner-occupied 4plex. Seems unusual..

A word of caution for @Cecilia P.  and others.. Cities have their own individual laws sometimes also, especially in high-cost areas. For example, all those things about honoring leases are true. Except in Oakland, there are still "just cause" eviction rules and rent control, so you can't just "not renew" leases for non-owner occupants in your owner-occupied 4plex. You're pretty much stuck with them..

However, the rent adjustment program (rent control) doesn't even apply to owner-occupied triplexes or smaller.. So there's a huge benefit to owner-occupying a triplex in Oakland rather than a 4plex, due to the local rules. Be sure to look up your own in the city you are looking in. Same goes for you Logan A. ,

I told them to call me, not knock on my door. And still had handyman handle most things anyway b/c I'm busy with other things (like acquiring more properties!) I would mostly tell them to get a list of any problems, then handyman would come by and do all of them. He lives there now ;)

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com

J. M. 

  good point on rent control... and yes local laws should be checked.. the exemption for owner occ 2 to 4 units when it comes to selecting tenants is the federal law.

It is also on all the CE class's that I take both for NMLS and RE brokers CE in Oregon and CA.. And even MS... its the reason I tuned into that one.. AS I would not have thought that was case until learned it in Real Estate CE class's   so you see a RE licnese is good for some things...

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

J. M. thanks for the words of caution. I believe Washington state is stricter with some discrimination and fair housing laws so I'll be sure to look into local laws 

What is the typical proceedure to move into a plex if it is fully occupied? What type of eviction is that called again?

@J. Martin I had a question about this:

"FHA uses 75% of the non-owner unit rents to qualify you for the mortgage! Great way to up your price point through low downpayment, and your qualification through your tenants' payments!"

Do those units already need to be rented out in order for FHA to use them in respect to the loan you would be looking to qualify for? I'm assuming (using a 4-plex as an example), if you purchased it, and two units were rented, and you were going to live in one unit and rent the 4th unit too, then they would only consider the 2 units that were rented?

Originally posted by @Chanté Owens :

@J. Martin I had a question about this:

"FHA uses 75% of the non-owner unit rents to qualify you for the mortgage! Great way to up your price point through low downpayment, and your qualification through your tenants' payments!"

Do those units already need to be rented out in order for FHA to use them in respect to the loan you would be looking to qualify for? I'm assuming (using a 4-plex as an example), if you purchased it, and two units were rented, and you were going to live in one unit and rent the 4th unit too, then they would only consider the 2 units that were rented?

 Chante, YES, most likely, but check. I am not a loan agent/broker, so ask them. It changes from time to time. But I think it's still the same. As of 2 years ago, they used the rents in the appraisal. I purchased a vacant 4plex w/ an FHA loan and used the vacant rents to qualify. Although, they automatically assumed I'd be in the biggest unit (although I told them I'd be in the smallest one.) It didn't impact my qualifying, so I didn't push them on it. But at the time, my purchase price went from $250K, which can't get much more than a condo in a decent area at the time, to up to about $900K, depending on the rents..

@Matt Rosas ,

It's called an owner-occupant eviction (one of the "just causes" in the Oakland laws..) But still be aware that local laws apply. There are different rules for "protected tenants like the elderly & disabled, and sometimes for very long-term occupants. You may have to pay them also, depending on their circumstances and the city. Ask someone local for sure!!!

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com

Advantage #5- you get the best owner occupied mortgage rates (usually 1/4 to1/2% lower than investor loans.)

@J. Martin   Thanks so much for your response! When I get to that point, I'll definitely inquire with the mortgage broker I'll be working with to ensure I'm doing it correctly. I don't want to miss out on something by being impatient, or misunderstanding the process.

BP ROCKS!

Originally posted by @Cecilia P. :

@J. Martin   and @Jay Hinrichs  thanks for the words of caution. I believe Washington state is stricter with some discrimination and fair housing laws so I'll be sure to look into local laws 

 To your point Cecilia, King County in particular is far more strict than nearly all other counties in Washington. This is a major reason why myself and many others choose to invest outside of King County.

Originally posted by J. M.:

@Jay Hinrichs , I'm totally with you on the advantages, and I think you know my first purchase was an owner-occupied 4plex w/ an FHA loan. So I'm on board!

ANOTHER HUGE ADVANTAGE:
FHA uses 75% of the non-owner unit rents to qualify you for the mortgage! Great way to up your price point through low downpayment, and your qualification through your tenants' payments!

But since you're asking for the

DISADVANTAGES:
1) Finding a place that you (and your significant other(s)) are comfortable living - many investors I know have a family, job in a particular area, school district etc where it might be a better investment or the numbers work better outside where they need/want to live. Make sure the others in your life are on-board..
2) Sharing Walls - If you're already an apt dweller, probably no big deal. But I've found people really don't like moving out of SFH into apartments
3) Some investors DON'T want ANY property management duties. They'd rather farm it out to someone else. And don't want to live next to their tenants..
4) Price points - can still be challenging in the Bay Area at least. And for FHA, I think they only go up to $1.2MM for 4pexes in high-cost areas like SF, Oakland, Peninsula. That already throw out most of the 4plexes in nice areas (over about $400/sqft..)

Do you know of low-downpayment owner occupied loans that are not FHA specifically on owner-occupied 4PLEXES? SFH is no problem, and some duplexes are lower, but had a tough time getting below 20-25% downpayment on owner-occ 4plexes, even in the Bay..

Again, having done the owner-occ 4plex for my first purchase, it worked great for me and laid the foundation of cash flow to grow my portfolio. And I plan to do it again sometime! Highly recommended! Just wanted to throw out some of the disadvantages too, although these didn't stop me for my circumstances..

I'll never say never to out of state, but to each their own, and for their circumstances..

Great post Jay! I think you're spot on!

Good Points J,

There is a program that will allow 4 plex financing (non FHA) and its a conventional loan program too called My Community Mortgage. It allows owner occupied 4 plex up to 95% LTV or AKA 5% down payment but my problem is finding a mortgage insurer who will insure this product. Most MI companies have told me they only insure up to 2 units with less than 20% down.

The last option I know of that is owner occupied 4 units is VA, but you have to be or been a veteran at one time to obtain this 100% financing option.

Features of MCM or my community mortgage:

- must have no owned a primary residence for the last 3 years (can have owned rentals or non owners though)

- must make under the required area income limits - in OC you can make up to 140% of the area median income (AMI) and each county in the US varies on what you can make

- must take a home buyers education course

- lowered MI coverage required - this means cheaper mortgage insurance from a buyers perspective

- harder to find MI for this loan product (pending/researching)

- can finance up to 95% of the purchase price of a 4 unit owner occupied building

- can use 75% of gross rents of the other 3 units to help you qualify for the 4 plex purchase which makes it easier to buy

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

@Albert Bui  ,

Most of the terms of the loan program you're proposing sound great!!!!.. except that if I understand correctly, you can't really get it insured, therefore underwritten?

"- harder to find MI for this loan product (pending/researching)"

It's like telling me there's a great property, available at a discount, flexible closing terms. But the property's not for sale!

Let me know when you get everything lined up though!
Would like to meet you some time when I'm down there too.. Or likewise if you're up here!

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com

J. M. 

My loan officer said he has a loan program for 10% down, no MI on an OO 4plex.

Originally posted by @Amit M. :

Advantage #5- you get the best owner occupied mortgage rates (usually 1/4 to1/2% lower than investor loans.)

Actually, it's 0.5% premium or higher based on my experience on investment properties. When you do the calculations, a 20% down at OO interest rate and 25% down at NOO interest rate have about the same monthly mortgage payment. So it's definitely an advantage to buy as OO.

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