A deeded dock and water access for a duplex did not seem like a typical investment, so I knew I had to take a look. This was no ordinary duplex. It was for all practical purposes a two-level, single-family home known as a walk-out rambler or ranch home.
The lower level was finished as its own apartment and was occupied by a tenant. The zoning allowed for one to two units. It was marketed as a vacant duplex.
As I toured the property to see if it would be a good investment, I instantly loved the potential of the property. It needed considerable updating, but the price was right and the upside was huge.
Nestled in a tree-lined street, two blocks from a large seven-mile-long boating lake, among many higher-priced single-family homes, was this diamond in the rough on a three-fourths-acre, private cul-de-sac lot.
This was a home boasting close to 3,000 square feet with four bedrooms, five bathrooms, a two-car attached garage and a second garage with a loft and room for five cars, plus a pool.
Seriously, the garages would make any man, hobbyist or car lover drool.
When converted back to a single-family home and updated, this property would demand a much higher price.
There was no doubt I could make a big upside with this property
My challenge was that I had just purchased a four-unit apartment building about six weeks earlier and I did not have the cash needed for a down payment on another investment property.
There may have been a number of creative ways to buy this property, such as leveraging other properties or asking for seller-financing, but I chose the most lucrative path.
I decided to move into the property and make it my homestead and keep renting the bottom apartment to a tenant.
Buying the property as an owner-occupant and living in the property while I updated it offered a number of benefits.
It created an economical way to live, while executing the value play. Sure, there were limitations on tax-deductible expenses as the owner-occupied portion of home renovations were not deductible.
I wound up purchasing the property for $99,000 and over the course of five years I updated and renovated the property.
Most importantly I enjoyed what people refer to as resort-style living. I enjoyed the boating on the lake, the many pool parties and the enormous wood shop I had in the second garage.
After about five years when the tenant in the downstairs unit (yes the original six-year-long tenant) decided to move on, I converted the kitchen into a man cave style wet bar and the living room into a home theater room and the renovations were complete.
The renovation updates I made cost $55,000, for a total investment of $154,000. I sold it for $330,000.
This proved to be both fun and lucrative. It combined a highest and best use strategy, with an owner-occupied investment strategy that I highly recommend.
It is important to note that tax rules which apply to these investments may vary, so check with your CPA. The benefits are great and can create great upsides.
Over the years I have done a number of each of these owner-occupied and highest and best use strategies, either personally or assisting others to do so.
Here are the 5 benefits of an owner-occupied investment
- Lower interest rates: As an owner occupied property, it gives you the best interest rates possible, which goes to increase your cash flow and overall returns. Non-owner occupied loans are more expensive.
- Homestead credit: This allowed me to buy the property with only 5% down payment with lowest possible interest rate as well as get a homestead tax credit (reduced property taxes). NOTE: Homestead credit for owner occupied 2- to 4-unit buildings are fairly common but rules do change from county to county so you will want to add this to your due diligence if you decide on such an avenue.
- Low cost of living: With a tenant paying part of the house payment your living expenses are reduced drastically. In this property my tenant paid 60% of the expenses while only occupying 40% of the property size. This freed up money for me to do updates and renovations.
- Allow for do it yourself renovations: As is typical in an owner-occupied investment as you live there you have more luxury of time so most of the work I was able to do myself. Something I enjoy doing and was not so rushed to complete.
- Higher quality tenants with lower management cost: When tenants know their neighbor is their landlord you tend to attract better quality tenants. As you live in the building your management cost are eliminated as you are right there to take care of issues as they arise.
With these benefits, I have been able to help many first-time investors acquire their first properties. It is a lucrative and affordable way to get started.
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