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.pdfBasically, 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
