In the real estate industry, numerous terms are used to describe various circumstances. Therefore, when investing in real estate, it’s vital to understand the difference between a non-owner-occupied property and a house occupied by the owner. Most of the time, non owner occupied homes are investment properties unless the owner is “house hacking,” living in one unit and renting out the rest. In this article, we dive into the advantages of owning a non-owner-occupied property and obtaining financing for this method of real estate investing.

What Does Non Owner Occupied Mean?

Non owner occupied refers to an individual owning a property. However, they do not reside within the home as their primary residence. When referring to non-owner-occupied real estate, we tend to think of rental properties, vacation homes, or multi-family investments. Owning a non owner occpuied homes provides benefits such as tax deductions, passive income, and a diverse portfolio. However, there’s more risk involved because the homeowners aren’t as hands-on as if they lived in the property.

Types of Non-Owner-Occupied Properties

There’s a wide range of non-owner properties. Some consist of multi-unit homes, while others are single-family residences or vacation rentals like Airbnb.

• Long-term Rentals: Standard and traditional leases, typically starting with a yearly lease, then the ability to rent month-to-month. These long-term rentals are not occupied by the owner, usually consisting of a single-family house. Furthermore, most individuals who own long-term rentals own multiple properties, from their main residence to the secondary non-owner-occupied property.
• Short-term Rentals: A short-term non owner occupied rental property refers to a setup similar to Airbnb. Therefore, an individual may rent the property for any time frame from one day to multiple weeks. Furthermore, you always need a rental license for your non-owner occupied property. However, when dealing with short-term rentals consisting of 30 days or less, the owner also needs a limited lodging license.
• Multi-family Properties: The interesting part about multi-family residences; the owner can easily live within one of the units while renting out the other part of the home. Therefore, multi-family properties can either be non owner occupied or occupied by the owner through “house hacking.”
• Commercial Properties: Most commercial buildings are being rented out to businesses. However, if it’s a mixed-use commercial property, there’s a chance that the owner can rent the commercial unit while living within the residential unit. Most commercial buildings are owned by corporations. However, some non-owner-occupied commercial properties are owned by independent owners.

Benefits of Non Owner Occupied Properties

The benefits of owning a non owner occupied can vary depending upon the investment type and the investor’s overall goals. Below’s a list of 4 common advantages of owning a non-owner-occupied building:

1. Passive Income: Earning money by renting out a property with minimum day-to-day owner involvement. Therefore, owning a rental property in good shape with a paying tenant is every investor’s dream. Non owner occupied properties are the investor’s secondary property, that exists only to bring in rental income.
2. Property Appreciation: Within most real estate markets, properties increase in value while the homeowner builds equity in the home by paying down their loan amount. When searching for non-owner-occupied investment homes, examine the market trends. Furthermore, see how many properties were sold in the near distance within the last 6 months. That way, you get a feel for the potential property appreciation moving forward.
3. Tax Deductions: When you own a rental property, any repairs or improvements can balance out the income taxes owed. Therefore, to receive tax deductions involving rentals, the individual must be an absentee owner or the property non owner occupied. It’s important to note that when living in a multi-unit home, the owner can deduct any managing expenses involving the rental unit.
4. Portfolio Diversification: Any smart investor knows to apply their money to different forms of investment. As a real estate investor, to protect your assets, you want to participate in various forms of real estate within different markets. Therefore, if an area starts to trend in the wrong direction, it wouldn’t affect your entire portfolio. Diversify your investments to minimize the overall risk.

Challenges of Owning Property Where You Don’t Reside

• Higher Mortgage Interest Rates: Lenders view non owner occupied properties as involving more risk than loans for an individual’s primary home. The main reason is the potential for vacancy. At some point, most landlords fall into a period between tenants, which means the owner needs to find ways to pay their mortgage without the monthly rental income. On average, the interest rate for non owner occupied properties is 0.5% to 1.5% higher than an individual’s primary residence.
• More Challenging Loan Qualifications: Larger down payments can require above the standard 20% upfront, compared to the traditional 3%-20%. At times, these lenders may require a higher credit score, above 680.
• Maintenance Issues and Need for Property Manager: It’s difficult to oversee a property in which you do not reside. Issues can arise, and when overlooked, they can build up to be substantial problems. Therefore, when an owner doesn’t live in the house, these issues can build up until our annual inspections. Besides maintenance problems, it can be difficult to oversee the day-to-day operations, such as answering questions or collecting rent. Therefore, if you own a rental property out of state or which you don’t live near, consider using a property manager.

How to Finance Property Not Occupied by Owner

As we mentioned above, obtaining financing and purchasing a non owner occupied property may come with elaborate requirements. Investors have multiple financing options, such as conventional loans or a hard-money lender. The requirements may be more detailed, such as a larger down payment, a higher credit score, or a lower debt-to-income ratio.

On average, most lenders demand a down payment above the standard amount of 3%-20% (FHA and traditional down payment amounts.) The credit score expectations usually require above a 680, to show responsible spending. Financing an investment property presents a higher risk, considering it’s a second mortgage/loan outside of their primary residence. Lastly, these lenders want to protect themselves from a property sitting vacant and the owner falling behind on mortgage payments.

How to Get Started: Step-by-Step

1. Research the various forms of real estate investing. Define your goals, weigh out the pros and cons of each investment option to see what’s the best fit for you. Understand the risks associated with investing in non owner occupied properties. Being a landlord remotely can be challenging; realize there might be a need to hire a professional property manager.
2. Choose a location & property type. The next step will be to determine an area you prefer to invest. Obviously, an area with excellent schools, amenities, high rental rates, and low vacancy rates is ideal for any investor. However, some individuals may not obtain the funding for the most desirable neighborhoods. If considering the non owner occupied investment route, consider an area within a short distance of your house to keep an eye on things.
3. Secure Financing. Before viewing properties, it’s important to understand your buying power. Therefore, it’s vital to get pre-approved before speaking with a realtor and placing offers on homes. It’s suggested to speak with your bank first; these individuals know your spending habits. Additionally, since their larger institutions, they may have more favorable terms, such as interest rates and lower down payments. However, be aware that you have options when it comes to financing these properties, whether it’s a conventional or a hard money lender.
4. Utilize a real estate professional to analyze the real estate market and cash flow potential. An agent or another real estate pro can examine the market to see rental rates and vacancy rates. Furthermore, they can compare the rental rates to what your monthly mortgage payment will be to determine if it’s a smart investment. When working with these professionals, ensure your agent and lenders are on the same page to simplify a complicated process.

Mistakes to Avoid with Non Owner Occupied Homes

Investing in real estate can be lucrative if approached correctly. However, real estate can be very risky, so it’s important to conduct thorough research and avoid common mistakes. Here’s a few common mistakes to avoid when investing in non owner occupied properties.

• Underestimating repair costs. It can be difficult to determine how much home repairs can cost without receiving an estimate from a contractor. However, to best prepare yourself, it’s important to have a savings account for any issues that may arise. In addition to putting aside some of your rental income for repairs, it’s important to conduct regular inspections. Therefore, catching a repair problem early on can prevent the issue from getting worse and more costly.
• Never overpay for a property. When purchasing any form of real estate, you want to ensure the numbers make sense. If you overpay for a property, it can be hard to resell the home or even refinance your mortgage. Overpaying for a property can essentially lead to falling behind on payments leading to potential foreclosure. When purchasing investment properties, ensure you use the services of a professional, such as a real estate agent.
• Ignoring local laws and regulations. As we mentioned above, you need a rental license when operating a non owner occupied property. In addition, to obtain the rental license, you must follow the zoning laws. Therefore, not obeying the local laws can lead to substantial fines and eventually liens on the property.
• Properly screening tenants. Due to the desire to keep the place tenant occupied, we may not properly screen the tenants, including checking their background. Owning a rental property, whether it’s owner occupied or non owner occupied comes with enough risk. When paying monthly expenses, it’s vital to have a paying tenant within the property to ensure you don’t fall behind on payments.

Understand the Risks with Non Owner Occupied Homes

Although there’s risks associated with a non owner occupied homes, it’s also a great way to earn passive income and have the ability to manage your properties with potential tax deductions. Therefore, these non-owner-occupied properties consist of a wide range, from commercial buildings to single-family residences. Although purchasing these homes isn’t impossible, these properties can be more difficult to acquire due to more detailed stipulations. Furthermore, lenders approving loans for non-owner-occupied properties demand a lower DTI ratio, a higher credit score, and a larger down payment. However, there are options for obtaining the financing, so it’ll be best to shop around for the rates and requirements to find the best terms.

Never approach real estate investing alone, utilize the services of a realtor, and ensure your lender and agent are on the same page. If you have a desire to invest in non owner occupied properties or have any questions. Then feel free to call or text us at 267-420-2296 to guide you through the process of purchasing these properties.