Living in your own rental property carries a lot of advantages. First and foremost, it can help you get your foot in the door to a lucrative career in real estate investment. While buying both a single-family house for yourself and a rental property might be out of your reach for many years to come, you might be able to swing one two-unit building that fills both roles.
No Property Management Costs
Hiring a property manager can take 10 percent or more off your rental income, and you'll still get stuck making major decisions about tenants and maintenance. If you live on-site, you can respond to problems in the same way you would for your own unit. You'll be familiar enough with the building to understand problems more quickly, and your mere presence will improve the likelihood that systems are maintained to a standard that will keep many problems from developing.
Tenants Pay Your Mortgage
Some two-unit buildings sell for the same price as a detached single-family home, but will be less expensive to carry because the mortgage will be offset by the rent you receive from your tenants. The savings you reap can be invested in more property, or saved for a down payment on your dream house.
Combine Depreciation With Mortgage Interest Deduction
Depreciation is a key tax advantage of rental property. It allows you to deduct a portion of the building's cost, plus the cost of capital improvements, annually from the building's income. In some instances, depreciation can completely shield rental income from taxation. The mortgage interest deduction is one of the chief tax advantages of home ownership. It allows you to deduct the interest part of your mortgage payment from your income. When you live in your own rental property, you are able to enjoy both tax deductions, each prorated to reflect the proportion of the building devoted to rental and personal use.
Combine Capital Gains or 1031 Exchange With Tax Exemption
When you sell rental property, you either pay capital gains tax on the profits, which are usually less than the tax rate you pay on ordinary income, or you can defer taxes altogether and do a 1031 exchange, also called a tax-deferred exchange, into another rental property. When you sell your principal residence, you are entitled to up to $250,000 if you are single, or $500,000 if you are married, in tax-free profits. When you own rental property in which you also reside, you can combine both tax advantages, also prorated to reflect the proportion of profits associated with the rental and with your residence. It would be possible, for instance, to take the profit and buy a single-family residence for yourself and roll the profit from the rental portion of the building into a purely rental property.
Exemption From Rent Control
Some rent control ordinances in various jurisdictions exempt some owner-occupied rental property. The city of Berkeley, California, for instance, exempts many two-unit buildings from its rent control ordinance when one of the units is owner-occupied. As a result, the rent on the tenant-occupied unit can be raised whenever and however the landlord desires, subject only to state noticing requirements.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.