When it comes to real estate investing, one of the most common questions that arise is whether you can live in an investment property. The answer is not a straightforward yes or no, as it depends on various factors, including the type of investment, financing options, and local regulations. In this comprehensive guide, we’ll delve into the world of investment properties and explore the possibilities and limitations of living in one.
Understanding Investment Properties
Before we dive into the main topic, it’s essential to understand what an investment property is. An investment property is a real estate asset purchased with the primary goal of generating income, appreciation, or both. This can include rental properties, fix-and-flip projects, vacation homes, or even a primary residence with the intention of renting out a portion of it.
Investment properties can be classified into two main categories:
- Residential investments: These include single-family homes, apartments, condominiums, and townhouses, primarily used for rental income or long-term appreciation.
- Commercial investments: These include office buildings, retail spaces, warehouses, and other properties used for business purposes, generating rental income or capital appreciation.
Can You Live in an Investment Property?
Now, to the million-dollar question: can you live in an investment property? The answer depends on the type of investment and the financing options you’ve chosen.
Owner-Occupied Investment Properties
In some cases, yes, you can live in an investment property, but only if it’s an owner-occupied investment. This means you, the investor, occupy the property as your primary residence, and simultaneously, you rent out a portion of the property to tenants. For example:
- A duplex or triplex, where you live in one unit and rent out the others.
- A multi-unit property, such as a house with a basement apartment or an in-law suite.
- A vacation home, where you live in it for part of the year and rent it out to tourists during the peak season.
To qualify for an owner-occupied investment property, you’ll typically need to meet the following conditions:
- Live in the property for at least 12 months.
- Occupy a minimum of 50% of the total square footage.
- Have a legitimate rental agreement in place with tenants.
Non-Owner-Occupied Investment Properties
If you’ve purchased a non-owner-occupied investment property, you cannot live in it as your primary residence. This type of investment property is typically rented out to tenants, and you, the investor, do not occupy the property.
Examples of non-owner-occupied investment properties include:
- A single-family home, apartment, or condominium rented out to tenants.
- A commercial property, such as an office building or retail space, rented out to businesses.
Financing Options and Living in an Investment Property
When it comes to financing an investment property, lenders have different requirements and restrictions for owner-occupied and non-owner-occupied properties.
Owner-Occupied Financing
For owner-occupied investment properties, you can secure financing through traditional mortgage lenders, such as banks or credit unions. These lenders often offer more favorable interest rates and terms, as they consider the property to be your primary residence.
To qualify for owner-occupied financing, you’ll need to provide:
- A valid rental agreement with tenants.
- Documentation showing you occupy at least 50% of the property.
Non-Owner-Occupied Financing
For non-owner-occupied investment properties, financing options are more limited, and lenders tend to be more stringent with their requirements. You may need to secure financing through alternative lenders, such as hard money lenders or private money lenders, which often come with higher interest rates and fees.
To qualify for non-owner-occupied financing, you’ll typically need to:
- Provide a larger down payment (often 20% or more).
- Show a strong credit history and financial stability.
- Demonstrate a clear investment strategy and potential for rental income.
Local Regulations and Zoning Laws
Before making a decision on living in an investment property, it’s crucial to research local regulations and zoning laws. These laws can vary significantly depending on the location, and failing to comply can result in fines, penalties, or even legal action.
Some key factors to consider include:
Zoning Laws
Zoning laws dictate how properties can be used within a specific area. For example, a residential zone may not allow for commercial activities, while a commercial zone may have restrictions on residential use.
Rental Regulations
Rental regulations govern the rental of properties, including requirements for:
- Rental licenses and permits.
- Tenant screening and selection.
- Rent control and increases.
- Property maintenance and inspections.
Homeowners Association (HOA) Rules
If the investment property is part of a homeowners association, you’ll need to comply with the HOA’s rules and regulations, which may include restrictions on:
- Rentals and tenants.
- Property modifications and renovations.
- Parking and noise restrictions.
Tax Implications of Living in an Investment Property
Living in an investment property can have significant tax implications, both positively and negatively. It’s essential to consult with a tax professional to understand the specific implications for your situation.
Primary Residence Exemption
If you live in an owner-occupied investment property, you may be eligible for the primary residence exemption, which can reduce your taxable capital gains when selling the property.
Rental Income and Expenses
As a landlord, you can deduct rental income expenses, such as mortgage interest, property taxes, insurance, and maintenance costs, from your taxable income.
Depreciation and Amortization
You can depreciate the property over its useful life, reducing your taxable income. Additionally, you can amortize certain expenses, like mortgage points and closing costs, over the life of the loan.
Conclusion
Living in an investment property can be a viable option, but it’s essential to understand the complexities involved. From financing options to local regulations and tax implications, there are many factors to consider. By doing your due diligence and consulting with the right professionals, you can make an informed decision that aligns with your investment goals and personal circumstances.
Remember, always prioritize compliance with local regulations and zoning laws, and be prepared to adapt to changes in the market and tax laws. With the right approach, living in an investment property can be a smart and lucrative decision.
Can I live in an investment property full-time?
It is generally not recommended to live in an investment property full-time. This is because investment properties are typically purchased with the intention of generating rental income, and living in the property full-time would negate this purpose. Additionally, many mortgage lenders and insurance companies have specific rules and regulations governing owner-occupancy, and violating these rules could result in penalties or even loan forfeiture.
That being said, there may be certain circumstances in which you could live in an investment property full-time, such as if you’re a real estate investor who is actively managing the property and is also a resident of the property. However, this would likely require special permits and licenses, and would need to be carefully researched and planned to ensure compliance with all applicable laws and regulations.
Can I live in an investment property part-time?
Living in an investment property part-time is a more feasible option, but it still requires careful consideration and planning. For example, if you plan to rent out the property on a short-term basis, such as through a vacation rental platform, you may be able to live in the property for a portion of the year. Alternatively, you could use the property as a vacation home for yourself and your family, while still generating rental income during the times you’re not using it.
It’s essential to research the local laws and regulations governing short-term rentals, as well as any restrictions imposed by your mortgage lender and insurance company. You’ll also need to consider the tax implications of using the property for both personal and rental purposes, and ensure that you’re keeping accurate records of your usage and rental income.
Do I need to disclose my intention to live in an investment property?
Yes, it’s crucial to disclose your intention to live in an investment property to your mortgage lender, insurance company, and any other relevant parties. Failure to disclose this information could be considered fraud, and could result in serious consequences, including loan forfeiture or legal action. Be honest and upfront about your plans for the property, and make sure to carefully review and understand the terms of your loan and insurance policies.
It’s also important to consider the potential impact of your decision on your credit score and future loan applications. Lenders may view your request to live in an investment property as a higher risk, and may be less likely to approve future loan applications. Therefore, it’s essential to weigh the pros and cons of living in an investment property carefully, and to consider seeking the advice of a financial advisor or attorney.
Can I claim tax deductions for an investment property I live in?
If you live in an investment property, you may still be able to claim some tax deductions, but the rules can be complex and are subject to change. Generally, you’ll need to keep accurate records of your rental income and expenses, as well as the proportion of the property that is used for rental purposes. You may be able to claim deductions for expenses such as mortgage interest, property taxes, insurance, and maintenance, but these deductions will likely be reduced by the proportion of the property that is used for personal purposes.
It’s essential to consult with a tax professional or accountant to ensure you’re taking advantage of all the deductions you’re eligible for, while also complying with all relevant tax laws and regulations. They can help you navigate the complex rules and ensure you’re accurately reporting your income and expenses.
How do I determine the proportion of personal vs. rental use?
Determining the proportion of personal vs. rental use of an investment property can be challenging, especially if you’re using the property on a part-time basis. There are a few different methods you can use to calculate this proportion, including the number of days the property is rented vs. the number of days it’s used for personal purposes, or the square footage of the property that is dedicated to rental use.
It’s essential to keep accurate records of your usage, including a calendar or log of the dates the property is rented or used for personal purposes. You should also take photos and maintain other documentation to support your calculations, in case of an audit or other inquiry.
Can I sell an investment property I’ve lived in?
Yes, you can sell an investment property that you’ve lived in, but you’ll need to consider the tax implications of doing so. If you’ve claimed tax deductions for the property while you were living in it, you may be subject to capital gains tax or other penalties when you sell the property. Additionally, if you’ve depreciated the property’s value while you were living in it, you may need to recapture that depreciation when you sell.
It’s essential to consult with a tax professional or accountant to understand the tax implications of selling an investment property that you’ve lived in. They can help you navigate the complex rules and ensure you’re taking advantage of all the deductions and credits you’re eligible for.
Are there any special considerations for selling an investment property that’s been lived in?
Yes, there are several special considerations to keep in mind when selling an investment property that you’ve lived in. For example, you’ll need to disclose the property’s history of use to potential buyers, and may need to provide additional documentation or disclosures. You’ll also need to ensure that the property is in good condition and that any necessary repairs or maintenance are completed before listing the property for sale.
It’s also essential to consider the emotional and psychological aspects of selling a property that’s been your home. You may need to depersonalize the property and make it more neutral and attractive to potential buyers, which can be a difficult and emotional process. Working with a real estate agent or other professional can help make the process easier and less stressful.