Author Topic: Veteran's can purchase a rental house using the VA Loan Program... Sort of  (Read 5426 times)

jluoma

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Hello fellow Mustachians,

I'm new to the group - just discovered MMM a week ago and have been devouring content since!  So nice to discover a group of people with similar ambitions to my own.  Anyway, wanted to share a trick that veteran's can use to obtain a rental property that most people aren't aware exists.  Quick backstory - I purchased a townhome in 2011 for $270K in Leesburg, VA using a 30-year fixed 3.75% VA Loan.  Easy peasy, took us a little while because it was a foreclosure but it all worked out.  In 2013, a military friend told me it was possible to purchase a second home through a VA loan as well.  I did some research and long story short, I bought a second townhome (also a fixer-upper) just three months later 6 miles away and turned by original townhome into a rental.  Second home was $383K under a 30-year fixes 4.0% VA Loan.  Both homes cost no money down and do not have any PMI.  Pretty slick huh?  Now my first townhome is generating positive cash flow and paying down principal every month with little effort by me. 

What's a VA Loan?
VA loans are home loans for the purchase of a primary residence available to consumers who have served or are presently serving in the U.S. military. Those eligible include: Veterans, Active-duty personnel, Reservists/National Guard members, and some surviving spouses.  While the Department of Veterans Affairs (VA) does not lend money for VA loans, it backs loans made by private lenders (banks, savings and loans, or mortgage companies) to veterans who qualify.  Google will answer any question you have but basically the VA Loan will allow anyone who is eligible and has decent credit to buy a house with no money down and no PMI

Makes sense, how do I buy a second one?
So the VA isn't in the business of approving rental properties for veterans BUT is does not want to make sure veterans are covered if they have to move suddenly.  The idea being if they were called up to war or to relocate to a different region, you shouldn't force a veteran to have to sell their home IF they can still qualify for a loan under the VA maximum limits.  Herein lies the loophole, you don't have to be activated or relocated by the military to benefit from this - the option is available to all eligible participants.  There are two rules:
1.  You must move to the most recent house purchased (you can't stay in your current home and rent the new one).
2.  The purchase price of both homes combined is less than the county maximum allowed by the VA.

The first is just something you'll have to live with.  I will say that the VA doesn't send people out to spy on you to make sure actually follow this rule but I personally don't want to risk finding out.  I'm sure not everyone follows this rule, up to you. 

The second is the one that matters.  For this, you can google "Va Loan Maximum 2015" and find some links.  Here's one I came up with: http://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-Limits/FullCountyLoanLimitList2015_HERA-BASED_FINAL.pdf

Basically, find your state and county and look and the first column.  For me it's Virginia, Loudoun County.  The current limit is $625,500, this number has actually gone down from when I made my second purchase in 2013 (back then the limit was 850K).  Anyway, let's say you live in Loudoun County and bought your first home for $300K.  You've spent 325,500 less than the maximum amount allowed.  This means that you can still purchase a second home as long as you stay under that amount or come up with the difference in cash.  You will need to pay a higher kickback to the VA for allowing this which you can roll into the loan as well.  You've already bought house A for $300K, now you buy house B for $320K, you move into house B and rent out house A since the combined total is $620K, about 5K less than the current limit for Loudoun county. 

You do need to worry about your D/I ratio since you can't start claiming rental income until you have a signed contract in place.  I was lucky to have a signed contract of House A before making the purchase of house B so it was a non-issue.  I've heard rumors around the campfire of false leases from friend's as well but forge document at your own risk. 

There's a ton of information I'm leaving out because it is kind of an involved process and you'll need to do a good amount of research to see if it works for you.  But it is an option that you don't often hear about and can be done. 

Now I know taking on more debt is not exactly the MMM message but it allows you to create a brand new stream of passive income at the same time.  Having my rental close by means I can easily fix most things that come up.  The interest rates are low right now and getting a 30-year fixed loan through the VA for under 4% is still possible.  The rental house is essentially a giant piggy bank/back-up plan if life events happen.  While I'm still in the work-my-ass-off-and-save-as-much-as-possible phase, this debt is paying me back exponentially and is a much lower risk than other streams of passive income out there. 

I'm not a real estate person or a loan officer so make some calls.  USAA is a great start, it took me a little while to find a bank that was willing to work on the loan as well.  Also check out Homes for Heroes and other charitable organizations.  Many will find realtor's that will greatly discount their commission or even do it for free!

Home this helps!

Jim

Fallenour

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Re: Veteran's can purchase a rental house using the VA Loan Program... Sort of
« Reply #1 on: February 09, 2015, 10:17:42 AM »
From what I understand when I called the VA in regards to a VA loan, you are required to occupy the residence for a period of time, which I think is two years.

Please see the below source:

http://www.veteransunited.com/valoans/occupancy-requirements-for-va-loans/


jmusic

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Re: Veteran's can purchase a rental house using the VA Loan Program... Sort of
« Reply #2 on: February 09, 2015, 10:50:29 AM »
That's great info!  I'll be moving to Norfolk soon and I'm planning to finally dip my toe into the real estate business.  I've never owned a home before, but I've been interested in REI off and on for about 10 years.  My thoughts are to start with a duplex if I can find one where the numbers work well. 

Regarding the residency requirement, I couldn't find an answer on the REAL VA website, but the gouge I've heard is that you have 60 days from closing to move into the new home, and you're supposed to stay there for at least 1 year. 

Mazzinator

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Re: Veteran's can purchase a rental house using the VA Loan Program... Sort of
« Reply #3 on: February 09, 2015, 01:31:44 PM »
Jluoma..welcome to the forums!!!

Thanks for the info on VA loans... But, at that high of price point, i'm guessing your property isn't really cash flow positive. Especially if you have HOA fees. Great financing is icing on the cake, and doesn't make a deal good...

Care to share all your numbers?

For your info, google..

Biggerpockets.com
50% rule
1% and/or 2% rule

waltworks

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Re: Veteran's can purchase a rental house using the VA Loan Program... Sort of
« Reply #4 on: February 09, 2015, 02:36:02 PM »
In general this sounds like A) a violation of the spirit of the law and probably the letter of the law as well, B) a really bad idea, and C) just another reason I'm selling all my remaining rentals. Things are getting stupid again.

-W

jluoma

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Re: Veteran's can purchase a rental house using the VA Loan Program... Sort of
« Reply #5 on: February 09, 2015, 09:23:25 PM »
Mazzinator,

First off, thank you for sharing the biggerpockets website - that's a new resource that I've been flipping through all evening.  Happy to share the numbers and you're correct about it not matching the 50% or the 1% rule.  The rental property was not planned ahead of time and was more of an opportunistic reaction.  Here's the breakdown:

General Details
Purchase Price: $270,000
Current Zillow Value less 5%: $310,000

Costs
Mortgage (P&I): $1250
Taxes and Insurance: $325
HOA: $75
Total: $1650

Income:
Monthly Rental: $1900

Repairs have been minimal so far but I've only been renting it for 2 years now and my current tenants have taken very good care of everything plus I did some small renovations when I first purchased it.  The area I live in is a very fast growing county and the rental market is pretty decent.     If I run average maintenance and vacancy rates (even though I haven't experienced these yet), my true expenses are closer to the $2200 range.  My reasoning is that even though this gives me a negative monthly cash flow, I'm paying down the principal at close to $500/month and the house is appreciating as well.  Even if inflation stays low and this results in a 1% appreciation/year, that still adds roughly $250/month of additional gain.  1900+500+250 is 2650/month in the positive column versus the 2200 of true expenses. 

I don't disagree that my personal rental house isn't ideal as a rental (and it wasn't purchased for that reason).  However, someone armed with this knowledge that qualifies for the program could definitely benefit from considering the possibility of turning their first home into a rental once the 1-2 year waiting period had passed. 

Thanks!  Jim

escolegrove

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Re: Veteran's can purchase a rental house using the VA Loan Program... Sort of
« Reply #6 on: February 12, 2015, 04:13:46 AM »
Love va loans! We were able to use the entitlement over 2 loans too! Great program! They require you to live in the home for 12 months and they have a funding fee! Otherwise they are great!