There are two types of income, active income and passive income. Your active income requires you to dedicate your time and efforts to make money. This is likely your job, whereas passive income generates income without dedicating your time to your income. An income property occupies a grey area between passive and active income, as you will obviously be dedicating time and effort in the management of the building but will otherwise collect rent passively. When it comes to income properties there are many choices you will have to make. Do you want a property with one to four units, or one with five or more units? Will you live away from the property, or would you rather occupy a unit, making your property an owner-occupied income property? If you are considering the latter, stick around while we discuss the advantages and disadvantages of owner-occupied income properties.
What’s the deal with income properties?
When considering buildings for your income property, you must consider the number of units. One to four units is considered residential and it will be easier for you to obtain a mortgage. However, a building with five or more units will be considered a commercial building with much stricter requirements to meet. Commercial mortgages have stricter criteria, but you will also be facing higher interest rates. Consider if the rent would offset these factors.
Once you have decided on a building, you can begin to weigh the pros and cons of living among your tenants to see if that decision is right for you!
There are some advantages!
Down payment
When you apply for a mortgage on an owner-occupied income property your minimum down payment may be less than it otherwise would be. Lenders will add up to 50 per cent of the rental income to your annual income to determine affordability. This will help your debt service ratios and may reduce the size of your down payment. The minimum down payment varies based on the number of units. For one to two units the minimum down payment is five per cent. For three to four units, it is 10 per cent.
Property management savings
If you are thinking of buying an income property, you’ve likely already put thought into how it is going to be managed. Many non-owner-occupied property owners wind up spending an exorbitant amount on property management companies. However, if you live on-site, the situation changes. You can handle complaints and disputes, notify tenants of changes, and, depending on your skill level, do some of the handywork yourself. By bypassing property management companies to resolve issues within your building, you can stand to save hundreds and even thousands of dollars a year.
Responsiveness
On the note of management, when you live on-site, you can respond to complaints immediately. The benefit here is two-fold. When you respond to issues promptly you build good faith with your tenants and you will fix problems before they get worse and cause more expensive damage!
Rent
Rent is an advantage of any income property, owner-occupied or otherwise. When you collect rent, you have a passive stream of income that helps pay for the mortgage on the building. You can also write off a portion of your property taxes and mortgage interest payments annually.
A sense of community
This last one is not a guarantee, as not everyone builds relationships with their neighbours. However, when you live among your tenants, you do have a better chance to get to know them. Should you build positive relationships with your tenants you stand reap the benefits of community, such as a sense of belonging and support. This can also lead to tenants being more patient with you in hard times, such as renovations or management changes.
There are also some disadvantages
Now that we’ve discussed the advantages of owner-occupied income, it’s important that we also review the disadvantages. Many of the advantages come with built in disadvantages, so it depends greatly on where your priorities lie.
Complaints
As discussed before, when you live among your tenants you have the chance to respond to issues as they arise. This has its advantages, but when you are available, the resistance to complain becomes much smaller. This means you may be inundated with complaints that the tenants may have otherwise handled themselves.
Noise
When you live in an attached dwelling you are going to hear your neighbours. As certain as taxes, or death, living makes noise and that noise comes through thin walls. There are certainly reasonable restrictions you can put in place, such as “quiet times,” reasonable volume on TV and music, gathering rules, etc. However, even when these are respected, there’s simply the noise of living, especially if small children are in the picture. You also have to consider things like shift work. If you work midnights, when you shower and have your ‘morning commotion’ is when most people are sleeping. This does not mean that you will be up all hours of the day without a moment’s peace and quiet. It is, however, important to mentally prepare yourself if you’ve gone a while without living in a unit connected to others.
Privacy
Where there is the potential of developing a sense of community, there is a chance of having your privacy infringed upon. When tenants are more likely to complain to you, the complaints could come outside your designated hours if it’s deemed to be important enough. Again, it likely won’t be common practice, but it’s good to mentally prepare yourself for the eventuality of having a relaxing evening interrupted. It won’t be the end of the world, but it can be frustrating.
Should you invest in an owner-occupied income property?
Consider the advantages and disadvantages reviewed here. As stated before, it really depends on your priorities. If you feel the advantages outweigh the disadvantages, it is definitely an option to consider. If you have any questions about owner-occupied income properties, give me a call at (705) 333-4338 or get in touch with me here!