The beautiful thing about real estate is that you don't need long periods to build wealth - you only need to make wise choices through one market cycle to make a huge impact on your financial future. Think of yourself as standing at a cross roads, and whichever road you choose to go down will make the difference between long term financial security or always struggling and stressing about money. Today I wanted to discuss a seemingly small factor that experience has shown me is a huge predictor of future profitability for any homeowner or investor: owner occupancy.
When we are qualifying a potential buyer for a purchase loan, the banks look at about six fundamental factors. Most importantly are credit score, loan-to-value, and income, followed by job stability and assets. The bank also wants to know if the borrower is going to live in the house or not, which they call Owner-Occupied or Non-Owner Occupied.
If the property is considered Owner Occupied, meaning the buyer is committing to move into the house as their primary residence, then the bank will offer rates that are exceptionally lower than if it's an investment property. With a primary residence the borrower will also have to put significantly less money down.
The alternative is a Non-Owner Occupied loan, which usually means that it's going to be a rental property. The bank knows that statistically more rental property loans default and foreclose than with primary residences. Since their risk is higher, they charge higher rates and get more money down to insure their investment.
Here are some sample loan numbers on how powerful the Owner Occupied status is when purchasing a $300,000 home:
Owner Occupied Non-Owner Occupied Rental
100% financing 90% Loan (10% down)
$0 down $30,000 out of pocket!
6.25% loan rate 7.5% loan rate
$1,847 monthly loan payment $1,887 loan payment
So you pay a lower payment AND don't have to put $30,000 down! Do you think you could do something constructive with $30,000 in your bank account - like funding other investments, retirement planning, college planning, paying off "bad" credit card debt, etc.?
Underwriters typically make common sense decisions on whether to approve a loan as owner occupied: is the house being purchased larger and cost more than the home the borrowers already own? Is it closer to your work? If you own a 1,200 square foot house that you bought for $250,000, and you're buying a 2,000 square foot house for $400,000, no underwriter in the world will deny that it makes sense as a primary residence.
If you have an owner-occupied loan on your house but purchase another primary residence, the banks can't come back to you and change the status of the loan to non-owner occupied. They can't increase your payment or demand more money down. You can repeat the process as many times as you want and keep the Owner Occupied loans in your wake without changing them. That will run out once you have to refinance a home that you're not living in, so it's best to consult a qualified mortgage planner (me!) about your long term strategy.
Everyone wants to invest, but because of the prohibitive nature of Non-Owner Occupied loans, they end up investing in a smaller house in a marginal neighborhood with marginal tenants that needs a lot of work to make it livable and clean. Guess what? It won't appreciate in value like it should. By having to go "cheap" because their payment is too high and have to put too much $ down, and end up not buying an inferior product instead of buying QUALITY.
NOW LISTEN CLOSELY - THIS IS VERY IMPORTANT:
You can purchase a $400,000 Primary Residence for the same approximate cost as a $250,000 investment property! In a lot of cases, factoring in the higher interest rate, the money you'll have to put down, and deferred maintenance, prorated over a reasonable term of 5 years, your total "real dollar cost" is the same! Of course the $400,000 home should be better quality in a much better neighborhood, so it will appreciate in value at a much higher rate and even earn you more tax deductions.
Based on this knowledge, I'll show you how to buy a home in a buyers market without having to sell your current home. We'll manage a plan so you can "move up" to a beautiful big home for 70 cents on the dollar and keep your current home as an investment with a low-rate owner occupied loan! When home prices rebound in a few years and it's a seller's market again then you can revaluate whether to sell or keep the property long term. Viola - you just BOUGHT LOW AND SOLD HIGH like a true investor. I've seen my clients save or earn hundreds of thousands of dollars by managing this strategy correctly. Look for my next blog, "Moving On Up", and don't hesitate to call if you need anything!
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