The 9 Reasons Why Buying An Owner-Occupied Rental Property Is A Good First Step Into Rental Real Estate Investing

Andrew Carnegie, who became the richest American back in 1901 when he sold his company US Steel, said “90% of all millionaires become so through owning real estate.”

Now I didn’t fact check his quote but I agree with his sentiment around real estate.

Anyone following this blog knows that I am a big fan of real estate and believe real estate should be a cornerstone of any investment portfolio.

Real estate investment has many benefits including the ability to obtain financing, relatively steady cash flows, and tax advantages.

Those benefits are why I own more than 20 rental units. And, I am still active in the real estate market looking to add to my portfolio.

It is no wonder that real estate has turned many into millionaires. In turn, many millionaires invest in real estate.

If you want to look for sand, head to a desert.

If you want to create and accumulate wealth, look to real estate.

Just in the United States alone, the combined value of all residential houses is $33.6 trillion at the end of 2019 according to Zillow. That’s trillion, with a “t”.

Wouldn’t you want a piece of that action?

I know it can be daunting for someone new trying to get into real estate investing.

For many, buying their primary house is the single most expensive item they will ever purchase.

Now, to go and buy another one as an investment property is hard to fathom.

Based on my own experience, buying the first rental property is the toughest.

The Benefits Of Buying Close To Home

You might be wondering “if buying the first rental property is so tough, then how did you get started”?

As a native New Yorker and someone who still currently resides in the greatest city in the world (don’t just take my word for it, Time Out ranked NYC #1 in the 2019 best cities in the world survey), I am disposed to buying rental properties in New York City.

I think there are many benefits to buying properties close to where you live.

Without a doubt, it is much easier to learn, study and understand a neighborhood that is close to home.

It is also easier to attend open houses and physically inspect properties.

Management of the rental property after purchase also becomes easier the closer you are to the property.

The majority of my rental units are in fact located in New York City.

Not only was it challenging to start a real estate portfolio from scratch, but to do it in New York City becomes even more challenging because of the high price of real estate.

According to Zillow, the current median home price in New York City is $652,000. That is 2.6 times the median home price in the United States of $249,000.

Despite the high prices, my first rental property purchase was in New York City – Brooklyn to be more precise.

My First Rental Property Purchase

I got into my first rental by chance.

At the time, I was looking for a primary home to settle in with my wife and focused our search within Manhattan and Brooklyn.

We went to check out a lot of different places including apartments in coop buildings, condos in luxury buildings, and single family houses.

We came across a place we liked in Manhattan. After some negotiation, the seller accepted our offer on the apartment.

Just right before we were about to sign the purchase contract (in New York City, once the contract is signed, it is hard to back out of the purchase without losing the down payment), my wife decided to axe the purchase because she didn’t feel there was enough closet space.

That set us back to square one on our search.

Then my wife came across a property on Craigslist. Isn’t it crazy how people used to source homes on Craigslist in the old days?

The property happens to be a two family house (duplex) located in a family friendly area in Brooklyn.

We were not looking at multi-family houses at the time. We simply wanted to buy a house to call home and had no intentions of being landlords.

But after checking out the duplex, we headed home to run the numbers to see how much it would cost us to own the property.

By living in one unit, and renting out the other, our monthly costs were greatly reduced by the rental income.

The economics were just too compelling compared to other properties we have seen.

We negotiated with the seller on a purchase price we were comfortable with and then closed on the property.

We made one unit home and rented out the second unit during our stay there.

My first rental property was also my first primary home purchase.

I didn’t know it at the time but I believe making an owner-occupied rental property as your first rental property is a great move with many benefits.

You should consider doing the same.

Here are the 9 benefits of buying an owner-occupied rental property to start your rental real estate portfolio:

#1 Rental Income: Get A Place To Live While Someone Helps Pay The Mortgage

It is hard to become a first time homeowner. It is also hard to become a first time rental property owner.

Buying an owner-occupied rental property can make it easier to pull the trigger on both – at the same time.

Everything becomes easier when you have rental income to help pay the mortgage or expenses of the property such as real estate tax, insurance, and utilities.

A duplex is a greater starter property to both become a first time homeowner and, at the same time, a first time landlord.

Having a unit to call home is a great feeling. And then having another unit which generates income is a greater feeling.

The owner-occupied property can give you a first taste of how good it is to receive monthly checks in the form of rental payments.

For me, receiving the monthly rental payments was one of the key factors on why I ended up buying the duplex.

I was hooked on that feeling of receiving passive income and wanted to continue to increase that monthly rental amount by buying more rental properties.

#2 – Easier To Keep An Eye Out On The Property

I mentioned most of my retinal properties are located in New York City and listed some of the reasons why it is beneficial to live close to my rental properties.

You cannot get any closer to living near a rental property than living in the property itself.

This makes it so much easier to keep an eye out on the property.

Now you can easily find out if your renters are mixing their recycling with their garbage when the city dictates they should be separated. You can catch that in advance prior to getting a ticket.

How about being made aware of a leaky roof? Some renters can be very slow in identifying such a problem.

They might let the problem fester before making a call to the landlord.

A leaky roof, when not addressed timely, can cause major water damage to the walls and floors. It can also damage cabinets and cause mold.

What started out as a possible low cost repair can now cost 5 times as much to fix because the renter didn’t bother to make a phone call.

But living on the top unit of an owner-occupied property, you will be made aware of the leak when it first happens.

Even living on a lower unit with tenants on top can still lead to a faster awareness time. You are tipped off the minute water leaks into your apartment.

The ease of which to keep an eye out on the property results in greater peace of mind to the landlord.

#3 – Renters Take Better Care Of Property And Are Better Behaved When Landlord Is There

I believe renters tend to be better behaved when they know the landlord lives in the building, especially if it is a very small multi-family house.

At least, based on my own experience, that was the case.

I don’t think it is a stretch that this will be the case for most landlords’ experience when they share a building with a renter.

The concept is no different than when my boss is sitting right by me at work. Somehow, that proximity to someone who can impact my pay results in me being more disciplined and harder working.

I would wager the same goes for renters when the landlord is in the same building given that the landlord can remove the renter from the home if necessary.

Also, I find that having a good relationship with renters helps with them respecting the property more and taking better care of their rental.

Being able to see your renters who also happen to be your neighbor allows you to help build that relationship. In turn, the renters don’t just view you as a landlord, but a neighbor as well.

It is always easier to resolve any landlord-renter issues when you are dealing with a friendly face on the other side.

#4 – Save On Management Company Expense

Living in the property makes it easier to save on having to hire a management company or a super to manage the property.

I have set up arrangements with certain of my renters across my various rental properties to act as supers for my properties.

As super, the main responsibilities include taking out the trash cans during trash collection days, taking out the recycling, keeping the common spaces such as the hallway and staircase clean, as well as, keeping the ground cleared of snow and dirt.

All those tasks aren’t very time consuming but they must be performed a few times per week. Even living a 5 minute drive away would make it a big deal to head over to a rental property to take out the recycling.

I would have to perform those tasks by myself when living in a single family house. It doesn’t really create more work to perform them living in a duplex.

By performing those tasks, the landlord can save on paying a management company or a super money.

#5 – Gain Experience Running A Rental Property

Buying a duplex provided me with an opportunity of living in one unit and renting out the other.

I was a landlord with only 1 unit to handle.

When new at something, it is best to start off small to gain some experience with running a rental property.

I got hands-on experience on how to deal with renters, source prospective renters for a vacant unit and started compiling a list of good contractors that can help with repairs.

This provided me with a first taste on how to run a rental property without overwhelming me with having to deal with many units all at once.

#6 – Helps To Gain A Better Understanding Of The True Economics Of A Rental

The job of a real estate agent is to paint their property in the best light. Who can blame them when they are incentivized to sell the property at the highest price possible within the shortest time.

Real estate agents like to market rental properties by showing as high of an operating income as possible. Obviously, the property is shown in the best light when the rental income is high and the expenses are low.

I’ve seen so many properties where the real estate agents used very aggressive numbers on the rental income side. Some numbers are so aggressive that they are basically made up.

Now, if you have experience with a rental unit, you can better understand what rentals go for in the same neighborhood.

Unsurprisingly, real estate agents tend to understate the true expenses as well. But having actually served as a landlord, I was well aware of additional expenses not shown by real estate agents.

I became more knowledgeable about the true economics of a rental and all “hidden” expenses such as vacancies, repairs when renters move out, a new coat of paint on the unit, and potential broker’s fee to rent out the unit again.

Those costs can add up to a big dollar amount.

Having first hand knowledge of the true economics of a rental gave me a higher level of comfort in buying my second rental property.

#7 – Allow For The Purchase Of A Smaller Space Without Wasting Money For Space Not Needed

When my wife and I were out hunting for our first primary home together, we checked out many single family houses in Brooklyn.

There are a few advantages of owning a single family in Brooklyn versus owning an apartment in Manhattan.

Privacy is one advantage of a single family house versus being one of two hundred units in a building.

There is outdoor space with a front yard and backyard. Not to mention, the luxury of a washer-dryer, dishwasher and a garage.

Most of the single family houses we saw provided for more space.

We all heard stories of the shoe box sizes of New York City apartments. Having more space is a huge plus.

But those single family houses have too much space for what we really needed. If we purchased anyone of those, we would have been paying extra for square footage we didn’t need.

The duplex provided us with the benefits of single family ownership (privacy, outdoor space, washer/dryer, dishwasher, garage) but with a smaller square footage.

This way, I am not paying for space I don’t need.

#8 – Can Purchase A Higher Priced House Leading To Greater Return Down The Line

With the added benefit of the rental income, you might be able to buy a more expensive house than what you might otherwise feel comfortable with or can qualify for.

While the property might be a higher price, it doesn’t mean that there will be more cash flowing out of your own pocket each month. The rental income can help cover any additional cost in mortgage of buying a more expensive house.

Buying a higher priced property can serve you well down the line.

A 3% return on $1,000,000 is surely more than a 3% return on $600,000.

Imagine being able to come out of the gate on a pricier home and getting appreciation off of a bigger base.

Over many years, the appreciation on the high priced house can be significant.

#9 – Tax Advantages To Acquiring An Owner-Occupied Rental House

The tax benefits of real estate make real estate one of my favorite investment asset classes.

By being in an owner-occupied rental house, you can get a taste of the best of both worlds.

The allocation between the residential part of the property and the rental part of the property should be determined.

On the owner-occupied part, you receive the same tax benefits as a single family house. Mortgage interest and real estate tax payments can be deducted as itemized deductions against your taxable income.

On the rental part, you can deduct mortgage interest expense, real estate tax, insurance, landlord covered utilities and other operating expenses as deductions against rental income.

There is also depreciation, a cashless expense to reduce your income. To me, this is one of the biggest positives with owning rental properties for monthly cash flow proposes.

The ability to take depreciation is how I was able to generate a 6-figure cash flow without paying any income taxes.

Also, selling an owner-occupied duplex allows you to get the same tax treatment as any house on the part you lived in.

Final Thoughts

No one builds a real estate investment portfolio just by reading about it. Buying the first rental property is key.

An owner-occupied rental property such as a duplex is a great way to get started. It certainly was for me.

The 9 benefits of an owner-occupied rental property provided me with a positive experience on my first rental. That encouraged me to want to continue to build my real estate portfolio.

Maybe it can do the same for you.

To the audience: Have you ever purchased an owner-occupied rental property before? How was your experience with it? Did it provide you with experience on owning more rentals down the line? How did you purchase your first rental property?