Owner-occupied real estate is one of the best long-term investments
one can make. History has shown owner-occupied real estate
has produced tremendous long-term returns. In a few areas
of the country the tremendous returns have even been short-term.
In some cases homeowners have sold homes held 30 or 40
years, for 30 to 40 times their original cost. Other types
of real estate investments, are the non-owner occupied
rentals, and a combination of the owner-occupied/non owner-occupied
rentals. The least expensive for maintenance cost is the
owner-occupied real estate investment. The most costly
is the non owner-occupied rental.
The advantages and disadvantages for all three are listed
below.
Advantages of owner-occupied real estate are:
- You can qualify for the lowest interest real estate loans
available
- You can qualify for low down payment consideration, of
5%-10%. There are also extra low-down payment loans
for first time
buyers who qualify, as low as 3% down.
- You qualify for a full array of owner-occupied tax deductions.
- Most owner occupied homeowners take pride and joy in
maintaining their own home, so the long-term maintenance
is usually
reasonable.
- Owner-occupied real-estate profits have been tremendous
when held long-term.
- There is a capital gain exclusion for taxes up to $250,000
if you have lived in the house for 2 of 5 years.
Disadvantages of owner-occupied real estate:
- The debt carried when a home is leveraged with a mortgage
loan.
- The responsibility of up-keep, for some this is an advantage,
since they enjoy the up-keep.
The next possibility for real estate as an investment is
residential real estate rental property or 100% non owner-occupied
property. A few investors have very good luck with rental
real estate as an investment, while most find it very costly
and highly stressful to deal with tenants, even when a management
company is hired to collect rents and maintain the property.
The advantages of residential non owner-occupied real
estate as an investment (rental property):
- It is possible to have high returns when held long-term.
- You can depreciate the property (this is far more advantages
for property purchased prior to 1987 though, the depreciation
deduction is much less after that year).
- You get a deduction for up-keep.
Disadvantages of residential non-owner occupied real estate
as an investment (rental property):
- Non owner-occupied mortgage loans carry a higher interest
rate than owner-occupied loans.
- Required down payment for non owner-occupied loans is
much higher than owner-occupied loans. In many cases requiring
20%, compared to an owner-occupied loan of 3%-10% down.
- You must pay capital gains tax on profits, when you sell.
- Yearly maintenance cost for residential non owner-occupied
real estate is usually much higher than owner-occupied
cost. Most people simply do not properly maintain property
that does not belong to them.
- Long-term maintenance cost can be phenomenally high.
- Is difficult to find reasonably priced properties in
quality neighborhoods.
- Neighborhoods with a lot of "four rent" signs
are particularly difficult to avoid vacancies.
- Lost rents are not deductible.
- A low quality neighborhood (that with high unemployment),
brings a low quality tenant, i.e. the default rate on
rent payment is high.
- The debt carried when the rental is leveraged with a
mortgage.
The combination of an owner-occupied/non owner-occupied
residential real estate can be a viable consideration for
those who feel some form of non owner-occupied rental real
estate is a must, as an investment. An example of a combination
of residential owner-occupied and non-owner occupied real
estate is a four-plex where you live in one unit, and rent
the other three.
- The advantages of the combination owner-occupied/non-owner
occupied real estate investment:
- You can qualify for the lower interest owner-occupied
mortgage loan.
- You can qualify for the lower down payment of 10% allowed
with owner occupied real estate.
- You can deduct the repairs and up keep on the rental
portion.
- You are present to monitor the repairs and encourage
maintenance.
- You can depreciate the rental portion.
You have a better probability of purchasing a property in
a quality community, since your initial cost are lower
than a non-owner occupied property. A quality community
brings a higher probability of a quality tenant. Attracting
quality tenants is probably the most important aspect of
residential non-owner occupied investments.
- Disadvantages of the combination owner-occupied/non owner-
occupied real estate investment:
- Your tenants may know where you live.
- You can only deduct expenses for the rental real estate
portion of upkeep, but not your own.
You will be liable
for normal capital gains taxes on the non owner-occupied
portion when you
sell. There is a capital
gain exclusion on the owner-occupied portion. In our example
it would be 25% of the profit up to $250,000. This is current
as of 2004.
See IRS publication 527 at www.irs.gov:
Residential Real Estate Property
See IRS publication
523 at www.irs.gov: Selling Your Home
Lois Center-Shabazz is the founder of MsFinancialSavvy.com
and author of the 3-time award-winning personal finance book,
Let's Get Financial Savvy! ISBN #0971979502.
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