Author Topic: Buying future rental home with VA loan on active duty  (Read 4795 times)

turning_hapanese

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Buying future rental home with VA loan on active duty
« on: April 23, 2016, 02:03:25 PM »
I am currently stationed overseas but headed stateside in a few months to either Lackland AFB, Travis AFB, or Robins AFB (I'll probably find out for sure very soon). Location aside, I'm wondering about getting into real estate. My general idea is to buy a modest home near base, pay down the mortgage while saving up a good chunk of money for repairs, vacancies, etc., and renting it out when I have to leave. I've been doing a ton of research but it seems to be a very polarizing topic. Some people swear by it, while others would never do it again while on active duty. I know there are a lot of variables at play here, but does anyone have any good lessons learned from buying homes and renting them out when they PCS? I have about $35K in investment accounts that I can liquidate to make a down payment/cover closing costs, but I know I won't necessarily need a down payment if I use a VA loan. I am an E-5 with 10.5 years in with a wife and no kids yet if that helps. Any advice would be greatly appreciated!

turning_hapanese

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Re: Buying future rental home with VA loan on active duty
« Reply #1 on: April 24, 2016, 07:53:36 AM »
It definitely seemed those people didn't choose to be in that situation, but I can't really know for sure. A lot of what I've heard and read so far is anecdotal, but I'm not going to turn a blind eye to the possible realities ahead of me.

What are some things to look out for when interviewing Property Management companies? Any red flags to be on the lookout for?

For a beginner investor in the real estate game, should I be looking more into turnkey properties that don't require too much work or would I be able to jump into a low value property? Any experience with the VA Loan?

Crazydude

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Re: Buying future rental home with VA loan on active duty
« Reply #2 on: April 24, 2016, 08:13:51 PM »
I'm glad I found this! I did almost exactly what you're doing. When I was on Active Duty I bought a home on a VA loan. I wasn't planning on renting it out when I moved, but I did. Here's a breakdown of key things to know and do:

1. As with any rental, make sure the numbers add up. You'll here a lot on here about the 1% and 2% rules. Plus side with the VA loan is that $0 down kinda means everything after expenses is profit, becuause the initial investment was "$0".

2. Property manager: find someone/someplace who will actually do inspections. Mine is a very small company and the owner of the company does inspections in the house every six months.

3. THIS ONE IS HUGE!!! This will sound crazy but it's true. When you move, if you want to buy another house on a VA loan, and still have an active VA loan on the rental, you're next home purchase will HAVE to be AT LEAST $144,000. Yes that's right, it's called "Second Tier Eligibility" or something like that. I'm in this process right now.

Side note: the MAX purchase you can make under "Second Tier Eligibility" depends on how much "benefit" you used making your first purchase. You can get exact details with a quick Google search.

Let me know if you have other questions.
« Last Edit: April 24, 2016, 08:19:14 PM by Crazydude »

Drifterrider

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Re: Buying future rental home with VA loan on active duty
« Reply #3 on: April 26, 2016, 04:50:51 AM »
For your consideration:

You get stationed on the left coast (higher BAH) and buy a house factoring in your higher BAS.  Then you PCS to the east coast (lower BAH).  How long can you carry the mortgage if you don't have a tenant?

If you buy a house with the intention of keeping it as a rental you would want to carefully think about just using your base pay to determine if you can afford it.  You might also want to live in the area a while to find out where the best long term rentals are.  My father bought his first rental when he was an E-4 and rented it for the next 12 years before living in it himself (but then, he was an anomaly).  He made a profit and lived in a lesser expensive rental.

Above all else, don't get emotionally involved in the deal.  It is financial only.  Getting emotionally involved usually ends up costing you more.

YMMV

turning_hapanese

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Re: Buying future rental home with VA loan on active duty
« Reply #4 on: April 27, 2016, 07:18:25 AM »
I'm glad I found this! I did almost exactly what you're doing. When I was on Active Duty I bought a home on a VA loan. I wasn't planning on renting it out when I moved, but I did. Here's a breakdown of key things to know and do:

1. As with any rental, make sure the numbers add up. You'll here a lot on here about the 1% and 2% rules. Plus side with the VA loan is that $0 down kinda means everything after expenses is profit, becuause the initial investment was "$0".

2. Property manager: find someone/someplace who will actually do inspections. Mine is a very small company and the owner of the company does inspections in the house every six months.

3. THIS ONE IS HUGE!!! This will sound crazy but it's true. When you move, if you want to buy another house on a VA loan, and still have an active VA loan on the rental, you're next home purchase will HAVE to be AT LEAST $144,000. Yes that's right, it's called "Second Tier Eligibility" or something like that. I'm in this process right now.

Side note: the MAX purchase you can make under "Second Tier Eligibility" depends on how much "benefit" you used making your first purchase. You can get exact details with a quick Google search.

Let me know if you have other questions.

Thanks for all the great info! I'm learning more and more about what I can do with the VA loan and it's a lot more than I originally thought. I had heard you can take out a second VA loan, but I wasn't aware of the $144K minimum. That's definitely something I will keep in mind going forward.

In regards to analyzing the numbers on a prospective home I'm wondering if there is an efficient way to do this. I pulled up a random place near a base as an exercise and I was able to calculate a few things. Here is a possible scenario on a $285K 2 bed/2 bath single story:
$2049 - BAH
$1275 - Mortgage estimate
$90 - Property Tax
$50 - HOA
$83 - Homeowner's Insurance
$200-300 - Utilities
$280 - Maintenance fees
This adds up to $2078 which is pretty close to the BAH amount.

Are there any major periodic expenses I'm missing? Am I over/underestimating anything? What are some lessons learned you have to give? The rental estimate in this area is $1650 if that helps. Thanks in advance!

turning_hapanese

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Re: Buying future rental home with VA loan on active duty
« Reply #5 on: April 27, 2016, 07:46:37 AM »


Turnkey isn't the best fit for your situation, IMO.  Turnkey tends to include sticking a renter in there and also getting a house for slightly more than retail (often) because they are setting you up with a tenant right off the bat.  Often times these properties may be in neighborhoods that are mainly renter oriented so I'm not sure how you'd feel about living there.

You should be able to buy the property with VA loan no problem as long as it passes inspections.  A turnkey may or may not pass VA inspections and appraisals (which will require out of pocket from you).  Don't forget to account for the VA funding fee if you are doing zero down.  I have used VA loans twice in my life and I am about to turn a home into a rental property in 2 months that is on a zero down VA loan (a $400K property).  Just don't tell them you are planning to turn it into a rental eventually.  You are allowed to buy a home with a VA loan and then turn it into a rental property, but you are not supposed to originally buy with the sole intent of renting the property out.

Interviewing Property Management companies:
- how many doors they manage
- their screening process for new tenants (and what are the minimum qualifications)
- the market you are interested in
- do they personally own investment properties
- process for maintenance (approvals, quotes, in-house or 3rd party)
- process for move-in/out inspections
- ask for maybe 5 references and call at least 3 of them
- have they handled evictions
- how are invoices and tax forms maintained (is it online and accessible 24/7?)
- list of fees (new tenant lease, monthly, same tenant renewal of lease, first time setup fee, typical rental turnover fees)
- how often do they do inspections (exterior and interior) and do they have the maintenance people conduct "inspections" for them as well
- communications (is there another person in the office for when they might be sick / on vacation)

It should be a full on interview as you are hiring them to manage your 6-figure investment.  Good PM leads to good tenants leads to a sound passive investment.

Thanks for all the good information about turnkey properties. I'll probably stay away from them for the time being considering this is my first home purchase. Ideally, I'm looking for a place that I would be happy renting in that's for sale, buying it, living in it, and renting it out when I PCS.

As far as PM's, that's definitely a lot more than I considered so thanks for all the info!

turning_hapanese

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Re: Buying future rental home with VA loan on active duty
« Reply #6 on: April 27, 2016, 08:02:53 AM »
For your consideration:

You get stationed on the left coast (higher BAH) and buy a house factoring in your higher BAS.  Then you PCS to the east coast (lower BAH).  How long can you carry the mortgage if you don't have a tenant?

If you buy a house with the intention of keeping it as a rental you would want to carefully think about just using your base pay to determine if you can afford it.  You might also want to live in the area a while to find out where the best long term rentals are.  My father bought his first rental when he was an E-4 and rented it for the next 12 years before living in it himself (but then, he was an anomaly).  He made a profit and lived in a lesser expensive rental.

Above all else, don't get emotionally involved in the deal.  It is financial only.  Getting emotionally involved usually ends up costing you more.

YMMV

This is definitely something I've considered and I've heard of plenty of people being burned by an unexpected PCS and having to cover the mortgage and expenses while living in another location. I have a chunk of money tied up in short/long term stocks that I can liquidate if that situation were to come up (about $35K and growing) I'm also hoping to save any extra money from the BAH/mortgage difference after all the periodic expenses are accounted for. At this point in my career I have about 9.5 years to go towards retirement so I'm thinking very long term I would like to grab a few rental properties and become a Mustacian landlord/property manager. Hopefully I'll only have to PCS one more time before I retire, but I know nothing is guaranteed in the military. My first base I ended up staying at for 6 years so I know is possible though. Did you get burned by this in the past? Any advice?

Drifterrider

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Re: Buying future rental home with VA loan on active duty
« Reply #7 on: April 27, 2016, 08:24:16 AM »

This is definitely something I've considered and I've heard of plenty of people being burned by an unexpected PCS and having to cover the mortgage and expenses while living in another location. I have a chunk of money tied up in short/long term stocks that I can liquidate if that situation were to come up (about $35K and growing) I'm also hoping to save any extra money from the BAH/mortgage difference after all the periodic expenses are accounted for. At this point in my career I have about 9.5 years to go towards retirement so I'm thinking very long term I would like to grab a few rental properties and become a Mustacian landlord/property manager. Hopefully I'll only have to PCS one more time before I retire, but I know nothing is guaranteed in the military. My first base I ended up staying at for 6 years so I know is possible though. Did you get burned by this in the past? Any advice?
[/quote]

No.  I didn't buy a house until I left Active Duty.  Review your numbers.  Your carrying cost will (in the scenario you provided) be over $2,000 but you can only rent for $1,650.  BAD.

Using the 1% rule (If you can't get 1% of the cost in rent each month, move on.)  Your cost $285K.  If you can't get $2,850 per month in rent it isn't a good future rental.  And that doesn't make it a great bargain just one to consider. 

You mentioned Travis (I think) and unless that has been made a joint base you are AF.  On the east coast you are looking at bases from NJ down to Fla.  I would probably not buy property on the left coast because of the cost. 

Let's consider you get an east coast assignment in NC.  SJAFB is the base there (Pope was incorporated into Ft. Dragg).  For $120,000 and under you can get a 1600 sf 3/2 with garage.  A house like that would also rent for $1,200 per month (1% rule).  Without looking up the numbers I'd think your BAH would be in the $1,400 pm range.

Shop for a profitable rental house that you can live in, not for a home you might rent in the future.

My father bought his first house as an E-4 (this was Sergeant back then) in 1956.  He didn't live in it until 1968 (it went straight to rent for the first 12 years).  We lived in it for two years, my mother still owns and rents it.  58 out of 60 years as a rental.

Yes you can make a good deal but you have to shop carefully, run the numbers, be knowledgeable of the area before you buy and buy with the goal of buying a rental you can live in instead of a home you are in love with that you "Might" be able to rent in the future.


turning_hapanese

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Re: Buying future rental home with VA loan on active duty
« Reply #8 on: April 27, 2016, 09:48:17 AM »

You shouldn't have to pay utilities on a single family home rental unless that is the standard for the area where you want to have your rental.

Here is a spreadsheet that I threw together to make an assessment of renting out a property.  Feel free to save a copy to your computer and play with the numbers (alternatively, you could transport the equations into Google Sheets, but I have it in Excel at this time)

I don't have the tax approximations in that sheet because it will be dependent on your marginal effective tax rate and the state taxes.  Expenses + depreciation usually cancel out most of the rental income tax, but depreciation gets recaptured on the sale of the property so keep that in mind unless you can do a process known as a 1031 exchange to defer the depreciation along with the any capital gains taxes by having a new property ready to go that you roll all of the proceeds from the sale of a first investment property into.

Thanks for the spreadsheet! I'll definitely be poring over this is more detail. Also, thanks for pointing out the utilities portion of my budget. That's why I love these forums. There are so many people to learn from and so many sets of eyes to see things you don't. I don't even know where to start with taxes. What resources do you recommend for getting savvy on taxes? I plan on living in the house for a few years so I'd be able to plan out the renting venture for a bit.
« Last Edit: April 27, 2016, 11:29:38 AM by turning_hapanese »

Nords

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Re: Buying future rental home with VA loan on active duty
« Reply #9 on: April 30, 2016, 03:34:29 PM »
We've already posted in another thread about the risks of buying a home while you're on active duty, so I'll skip beyond that decision and move along to ideas on how to juggle your military career with landlording.

There are so many people to learn from and so many sets of eyes to see things you don't. I don't even know where to start with taxes. What resources do you recommend for getting savvy on taxes? I plan on living in the house for a few years so I'd be able to plan out the renting venture for a bit.
Here's what's worked for me and hundreds of other readers.  Most of these are in the library or free websites:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions),
(2) Landlording by Leigh Robinson (7th edition or later),
(3) Rent vs Own by Jane Hodges,
(4) Frank Gallinelli's "Real Data" website (free analysis tools),
(5) Brandon & Heather Turner's eBook "The Book On Managing Rental Properties".  He's a co-founder of Bigger Pockets.  I like the eBook format because it's much easier to search and highlight and bookmark.
(6) Josh Dorkin's "Bigger Pockets" website & forums.
(7) Paula Pant's "Afford Anything" posts on real estate.

A newer blogger in this niche is military spouse Elizabeth Colegrove of RelucantLandlord.net.  She's very highly leveraged (including VA loans) and her posts will give you a feel for being a landlord near a military base.  She and I have agreed to disagree on some of the landlord tactics (and her risk profile) yet she's a great example of what you can do with cheap mortgages and hard work.

When you're seeking a break with entertaining schadenfreude, apply to join the Facebook group "Military Landlords".  (Tell the admin you're considering becoming a landlord.)  I've learned a lot more about hoarders, cooking meth, and Child Protective Services than I have about taxes on rental properties-- but it'll give you an appreciation for a rigorous tenant screening process.
« Last Edit: April 30, 2016, 03:36:10 PM by Nords »