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Home » Investment property » Owner-Occupied vs. Non-Owner-Occupied Real Estate: What’s the Difference?

If you’re looking to invest in real estate, but you don’t know what type of mortgage to get, you can choose between an owner-occupied and non-owner-occupied property mortgage. Let’s take a look at their key differences so you can make an informed choice for your South Florida rental property.

What Is an Owner-Occupied Property?

An owner-occupied property is a type of residential property wherein the owner resides in it. In other words, it is the property owner’s primary residence. With owner-occupied properties, the owner’s name is in the property’s title.

What Is a Non-Owner-Occupied Property?

A non-owner-occupied property is a residential property that is owned by a person who does not intend to use it as their primary residence. Instead, it is turned into a rental property. The costs for maintenance, repairs, and more are financed by the owner, but they do not reside in it.

In short, if you purchase a South Florida property but you do not intend to live in it, you have a non-owner-occupied property on your hands. For instance, if you purchase a single-family home, get a property management agent to see to its day-to-day needs, and you live elsewhere, your property is a non-owner-occupied property.

Why Is It Important to Determine the Property’s Status?

Why Is It Important to Determine the Property’s Status?

It is important to determine whether a property is owner-occupied or non-owner-occupied as the interest rate is dependent on these. Owner-occupied homes tend to have more favorable terms as there is a lower probability of default. A default is when the borrower fails to pay their monthly payments.

Lenders believe there is reduced risk in owner-occupied properties as these will have to be occupied by the homeowner at some point. Remember, if you buy a property in the United States, you need to sign the HUD-9548D. This document states that you need to reside on the property for at least one year.  Besides, if homeowners defaulted on an owner-occupied property, they would be homeless, so there’s a lower chance of default.

Why Are Loans For Non-Owner-Occupied Properties More Expensive?

In general, non-owner-occupied properties have a higher interest rate. The reason is that they are owned by investors who do not intend to live there at all. Compared to owner-occupied properties where the owner’s home is held as collateral, real estate investors are more likely to not make their monthly payments. After all, if they fail to pay, that doesn’t translate to homelessness for them.

Aside from the interest rate, lenders can also collect a substantial downpayment from borrowers who own non-owner-occupied properties. They do this to protect themselves in case the real estate investor defaults.

Do You Need a Non-Owner-Occupied Mortgage?

Your property management company can help you determine what type of mortgage to get for your specific situation. However, as a general rule, if you have no intention of living in your single-family home, townhouse, or more, you need to get a non-owner-occupied mortgage. You may get a mortgage for an owner-occupied property if you plan to live in one of its units, while you rent out the rest.

What Are the Pros and Cons of Owner-Occupied Rental Properties?

What Are the Pros and Cons of Owner-Occupied Rental Properties?

With an owner-occupied property, you’ll be able to get lower interest rates and lower down payment, but as with every investment, it comes with pros and cons. Let’s take a look at them so you can make the correct choice for your specific circumstances:

Pros of Owner-Occupied Rental Properties

It can be beneficial to be an owner-occupant as you can roll your loans into one. Here are a few of the reasons why owner-occupied rental properties are a worthy choice:

  • Only One Mortgage. You won’t need to get two separate mortgages for your owner-occupied and non-owner-occupied properties. You can consolidate the two – that way, you no longer need to manage multiple mortgages.
  • Stay on Top of Maintenance. Since you live on-site, you’ll be able to deal with your tenants’ every need. For instance, if there’s a water leak, they can report the concern ASAP. Plus, you can make sure that your tenants are really taking care of the rental – after all, they did agree to it in the lease agreement.
  • More Affordable Than Non-Owner-Occupied Loans. One way to lower your interest rate is to be an owner-occupant. This can break down the barrier to entry for first-time real estate investors.

Cons of Owner-Occupied Rental Properties

Not all rental property owners are owner-occupants for these reasons:

  • Noisy Neighbors. Your tenants will probably be noisy, but the problem with owner-occupied properties is that you’ll be right beside them, listening to noise day in and day out. What’s worse is that other tenants may complain about the noise, and since you’re their neighbor, they can ring your doorbell at any time.
  • Hard to Find Tenants. You’ll probably have a hard time convincing tenants to be your neighbor. Fortunately, you can mitigate this by partnering with a reputable property management firm.
  • Constant Complaints. Prepare to have tenants who report repairs, complaints, and more every day. Since you’re next door, expect your tenants to treat you as their go-to repairman for when something goes wrong.

Don’t Commit Occupancy Fraud

Don’t Commit Occupancy Fraud

You can operate an owner-occupied rental and benefit from lower interest rates at the same time, but you shouldn’t get a mortgage for an owner-occupied rental if you don’t have any intention to live there. Keep in mind that owner-occupied rentals work only when you live in one of the units. Therefore, if you own a four-unit multifamily property, you can live in one of the units and rent out the other three to tenants.

You should always be clear about your intentions. If you plan to rent it out and never live in it, don’t be tempted to obtain an owner-occupied loan for its low-interest rates. If you lie, you will be in legal trouble – and that could permanently ruin your reputation. It would be wise to consult a property management professional who can help you figure out what mortgage to go for.

The Bottom Line

Now that you know what sets an owner-occupied property apart from a non-owner-occupied property, you can get the right mortgage for your real estate investment. As a rule of thumb, if you do not intend to live in your real estate investment, get a non-owner-occupied property – it’s the legal thing to do.

And remember, if you’re ever confused about which mortgage to get for your real estate investment, you can always consult the experts at Luxury Property Care. Contact us at (561) 944 – 2992 or complete our contact form for more information.

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