What does what is an owner occupant mean? What's the difference between owner occupant and a non owner occupant? When you are an owner-occupant, you own the property in which you live - it your primary residence. Yes, seems pretty obvious. The reverse, a non owner occupied property, is known as an investment property, one in which you rent out and don't live in. Yes, pretty simple, but does sound a bit confusing at times.
And when you make modifications to a property as a owner occupant, such as installing new kitchen cabinets or retiling the bathroom floor, before moving into a new house and repeating the process all over again, then you’re what is called a “serial home seller" or "flipper". Instead of renting out the property you fix up you sell it right away.
Or, you might be someone who's seen too many reality TV shows about real estate, you know Flip it or List It or the Property Brothers. But there is money to be made in buying properties, living in them for a while and fixing them up and selling them - that's what real estate investing is all about. There's also tax and financing benefits when you live in the property for a period of time and then sell it.
As you may have gathered, these kinds of investors are often handymen and love to tackle minor renovation projects. Basically, they move into a fixer-upper home, make improvements, and then sell the finished house for a large profit. Tax-free. That’s right, their profit is completely untaxed.
However, the market is now much different, due to the housing market crash, the flip and sell model is on hold in much of the United States. The own, remodel and then sell strategy might just be centered on unique homes in areas where there's not much room for growth, say in sections of bigger cities, like Seattle, Portland or San Francisco.
KEY: The general idea is based off the Internal Revenue Code 121, where you're entitled to a capital gains tax exclusion of up to $250,000 of the profit, or $500,000 for a married couple who files jointly. This is a benefit not just for those who are remodeling a home and then flipping it - it's a great benefit for all property owners.
To gain eligibility for this tax break, you are required to have owned and occupied your main residence for at least 2 years prior to your first sale. Although millions of home sellers take advantage of this tax exemption each year, very few people actually use this break to create a continuous tax-free real estate business every 24 months (consult your personal tax advisor for full details).
So if you’d like to give it a shot, here’s how:
- Buy a solid, conveniently-located house that requires minor renovation.
- Move in and declare it as your principal residence for at least 2 years.
- Make profitable improvements to the house. In the long run, these expenses cost much less than the market value they add.
- Sell the house with a price tag that doesn’t exceed $250,000 (or $500,000 for qualified spouses). Remember, the profit is tax-free.
- Repeat these steps every 2 years.
There also differences in the type of mortgage you qualify for and the interest rate with owner occupied verses non owner occupied loans. For example, with Fannie Mae and Freddie Mac loans the owner must live in the property for the majority of the year.
A bonus to this approach is that when you intend to live in your house for a year or more, lenders will feel more obliged to give you favorable mortgage terms because they feel that you are less likely to default on the mortgage.
However, there are several crucial mistakes you’ll want to avoid if you're looking to remodel a home and then flip it.
- Do not buy a house that’s already in excellent condition. There won’t be much for you to renovate and profit from.
- Do not buy a house that’s in such bad shape that it would better suit a scrap heap than a family. It’s extremely difficult to profit from these run-down homes. But if you do find yourself in possession of such a property, make sure to not pay more than its land value alone.
These are not hard and fast rules, it all depends upon the type of investor you are and the skills that you have - if you're in construction then remodeling a property is exactly what you want to do, but you have to determine the cost of your time and the materials and then the ensuing increased value of the property - is it worth it for this particular property and area?
Stay away from condominiums and townhouses. Usually, there's little profit to be earned from these properties because their market value is severely repressed due to sale prices of similar condos or townhouses in the surrounding area. Even if you do fix up one of these properties, the market value will be disappointingly low because the neighboring units might be ugly and in bad shape.
Don’t even consider buying a house in a bad location, high crime area, or poor school district. These are three important factors for home buyers that cannot be overlooked. If you choose to ignore them, the resale value of your home will be subdued, regardless of how nicely you fix up the property.
Being a serial home seller may seem like an easy and profitable endeavor, but be forewarned. Constant renovations can be disturbing to a marriage’s or a family’s sense of stability and peace. But by making it a joint effort, you can minimize the stress for both you and your family.
Planning in advance can save you a lot of hassle. For instance, once you purchase a house, it’s possible to complete the upgrade work before you move in to prevent workers from bustling about your private life. Or take a vacation while the bulk or most arduous of renovation occurs. When you return, you’ll be greeted by a brand new house!
Also, unforeseen accidents can pop up when you least expect it, such as a roof collapsing or someone knocks a gaping hole in the wall. Whoops! So it’s wise to just expect the unexpected, and to basically uphold a patient temperament.
The key to making a profit as an owner occupant on these fixer-uppers is to make cost-effective medications, which you can read about in the article create property value.