Can Your Property Be a Home and an Investment at the Same Time?

So you’re hearing a lot about real estate investment opportunities, but you’re not on the market for an actual investment property.

Are there ways to purchase your home as a residence and generate income? Yes, you can! There are important tax and mortgage regulations and requirements you’ll need to consider, but with the right strategy, you can make your home an investment while you live there.

Quick Takeaways

  • There are three types of home occupancy mortgage lenders recognize: primary residence, secondary residence, and investment property.
  • You can live in your home while using it to generate income by renting part or all of your property, purchasing a multi-unit property, or buying and flipping your home for profit.
  • In all scenarios, tax and mortgage requirements must be considered and met by the buyer.

Real Estate Occupancy Types

There are three occupancy types that mortgage lenders use to classify loans:

  • Primary Residence – a home that the buyer will live in the majority of the calendar year
  • Secondary Residence – a home the buyer intends to occupy in addition to their primary residence, either by vacationing there or visiting frequently
  • Investment Property – a home purchased with the intention for it to be an income-generating property

Because each occupancy type has a different level of risk (at least as perceived by the lender), buyers must communicate the intended use of a property when they apply for a loan. Even after a purchase is complete, buyers are required to let lenders (and the IRS) know when the use of their property has changed.

Occupancy Types

This means that if you’re thinking about living in a residence and using it as an investment property (either at the same time or in the future), it’s not as easy as buying the home and deciding later.

Can Your Property Be a Home and Investment?

There are mortgage and tax requirements that must be met, but you can buy a home that you’ll live in and use to generate income at the same time.

Here are five ways to do it:

Buy a Multi-Unit Property

Buying a multi-unit property is one of the only ways you can simultaneously live in a home as your primary residence and generate rental income from the same property.

Buyers who purchase a 2-4 unit home are still eligible for the financing options available to primary home purchasers. Loan limits for multi-unit homes are also higher.

Living in and renting a multi-unit property is a great way to reduce or even eliminate your monthly mortgage payment while building home equity at the same time.

Buy, Live, and Flip

Investing in a flip property means you purchase a home that needs work, live in it while you do the work (yourself or by hiring contractors to do it), then sell the renovated property at a profit.

One of the biggest benefits to living in and selling a flip is that you can make a significant tax-free profit when you sell (up to $250K for single filers and $500K for joint filers). To be eligible, though, buyers have to have owned and lived in the home for at least two years prior to selling.

A word of caution: flipping can be extremely profitable, but it’s not quite as glamorous as HGTV shows make it seem.

Successful home flipping takes some serious skill, knowledge, and experience. Without it, buyers risk losing money instead. If you’re thinking about buying a home to flip, it’s a good idea to find someone with expertise to help you make the best buying decision and mentor you through the process.

Rent Out Part of Your Property

This is different from purchasing a multi-unit home. When you rent part of your property, it usually means a room or a detached structure (like an in-law suite) to generate income.

Common ways people do this is by finding a roommate to live in a spare bedroom or signing up with companies like Airbnb or Vrbo to allow travelers to rent out part of their space.

Buy with Intent to Rent

Buying with the intent to rent is a great option for first-time homebuyers who are thinking about real estate investment strategies down the road.

If you’re purchasing a starter home and think you may want to use it as a rental property in the future, you can take specific factors into consideration that make a property more likely to have rental success. Some of these factors include location, safety, and desirable home upgrades.

Buying with the intent to rent means you can also get to know the property and make upgrades gradually as you live there.

Rent Your Second Home

Renting your second home can be a great way to use it as an investment without having to declare it an investment property, especially if it’s located in a great vacation spot or high-traffic city where you’re not spending all of your time.

The caveat: you must rent it for 14 days or less in the calendar year (in this scenario, your rental income is tax-free) or live in it for 10% or more of the number of days you rent it.

Fourteen days might not sound like much of an opportunity, but if there are particular times when you can bring in high short-term rental income (like renting your second home in New Orleans for Mardi Gras) you can make a serious profit in just a few days without worrying about paying taxes on the income.

Making the Right Decision For You

It’s possible to make your home an investment at the same time, but it’s also important to consider what your primary use of the property will be and make the decision that’s best for you and your family.

If you only consider income-generating possibilities without thinking about what your own living situation will be like, you can run into unhappy situations down the road.

Conversely, if you’re savvy when you buy and fully understand the relevant mortgage and tax regulations, you can find ways to generate passive income and/or significant profit from a property while living there, too.

Oberer Homes can help you find the perfect home for you in the Dayton area. Contact us today to learn more!

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