Take advantage of equity + VA loan to do a flip? Thinking outside the box

[Valvore]

I want to get some savvy investor/flipper opinions on my current situation. I have some equity to take advantage of along with VA Loan benefits. How did you start flipping? Where did you get the capital? Spit ballin' ideas here so please give thoughts on general plan and ignore specifics because I don't really have them yet.

General Background information

- I've been watching my areas real estate market pretty closely since 2015 so I understand my local market fairly well. Prices were climbing and flippers were going crazy. It has started to calm down but there are still some good homes that could be flipped for profit but don't have enough of a profit margin for the greedy cash flippers to come in and work on. (they do ~30% profit)
- I am fairly handy. I have remodeled my own kitchen, done flooring, plumbing, installed a toilet and even some electrical fixes in my own home. I am able to do nice work for 1/2 cost of contractors.
- Both mine and DH's credit scores are ~810
- When we bought our current home with the VA Loan we were able to put 0% down and paid only $2K in closing costs. (VA Loan is incredible)
- According to mortgage calculators that consider debt to income ratio we can carry mortgage loan(s) up to 700K or so.
- I would either get my own real estate license or use a friend in the industry to sell who would take a discounted commission

Primary Residence 3b/2ba
Original 30-yr VA Loan principal: $217,500
Start date of mortgage: August 2015
Current principal: $198,000
Current interest rate: 3.75%
Current value of home according to zillow: $305,000
Note: Could appraise for even more because of upgrades I've made. Bought one of the worst houses on a great street in a great neighborhood.

The crazy plan...
1. Do a zero closing cost re-fi on current home for 80% LTV which is 244K. This would give us 46K cash. New loan should have rate at <4%
2. Find the RIGHT home to do a live in-flip. Purchase price would be <250K
3. Finance with VA loan to put 0% down and pay ~2K in closing costs
4. Take remaining 44K to do flooring, kitchen, bathrooms, doors, trim and paint. Try and stay 2/5 years.
5. Sell home for a 15%+ profit OR rent house and move on to next live in fix.
6. Repeat steps 2 - 5 with added flip profits until I reach my FIRE number

I have been listening to the book Set for Life by Scott Trench. And while it does go a little fantasy land sometimes, I DO think I could get to FIRE a lot sooner than the 4 -8 years I have planned if I start thinking outside the box. Slow and steady will definitely work, but what if I could get there much sooner? I especially love projects and if the first flip or two were successful, I could quit my job to do the last few flips and be semi-FIRE and get to FIRE even sooner.  I figured the WORST that could happen is I don't sell the flipped home for a profit and come out even or even slightly worse off. I can afford the higher mortgage of 244K so small risk for big reward?

[EDIT] Changed OP to involve live in flip instead of investor flip in order to abide by VA Loan residency requirements.

[Kierun]

The crazy plan...
1. Do a zero closing cost re-fi on current home for 80% LTV which is 244K. This would give us 46K cash. New loan should have rate at <4%
2. Find the RIGHT home to do a flip. Purchase price would be <250K
3. Finance with VA loan to put 0% down and pay ~2K in closing costs
4. Take remaining 44K to do flooring, kitchen, bathrooms, doors, trim and paint within 60 days to circumvent occupancy requirement of VA Loan.
5. Sell home for a 12 - 15% profit
6. Repeat steps 2 - 5 with added flip profits until I reach my FIRE number

You would be violating the law when you certify that you intend to personally occupy the property as your home. Lenders and the VA may question why you're looking to buy another property when you are already living in one. What you could consider would be to rent out your current property and live in the newly purchased property for awhile and then look to sell the property. Definitely can't use the VA loan for investment purposes such as flipping. It's intended purpose is to allow military members an opportunity to purchase a home, not to give military members an edge in real estate investment.

[Jon Bon]

Yeah there is a bunch to unpack here. Sounds like you are just getting started down this path, which is fine. Everyone has to start somewhere.  Investment properties do have different rules  than primary residences. So you need to figure out those exact rules for your state. I would find a good banker and a good title company. These people do this stuff all day every day. Offer to pay them for their time and get as much information from them as possible. Books and the internet are no good because every state (sometimes city) has very different rules.

You best bet would be refi/sell or your current home with the expectation of making it an investment house. Then make the new house your primary residence put the 3% down and do renovations. You would have to be willing to live in it for a while but the 2/5 years rule is awesome to cash in capital gains. You could do this every 2 years, but you have to be willing to live in a crap house and as soon as you get it nice you get to sell it. YMMV

Well I don't know any 'professional flippers' probably because I dont trust those guys. However my understanding one method is that there is a partnership with 2 parties.

Party 1 is the money party, the provide all the cash for the deal
Party 2 is operations, they do all the work.

If party 2 fucks up the property reverts to party one so they are at least covered some. If the property is sold for a gain the profits are split between both parties. No idea if this is how people still do it, but it feels pretty fair to me.

[Valvore]

You're right @Kierun. VA loan financing with intention to flip isn't legal. I didn't realize that in my fervor when writing my post. However, I do think there may be a way to utilize the VA loan legally. Mainly by intending to live in the home with the VA loan.

My second idea was to do a live in fix and rent out my current house or sell it. I wouldn't mind living in the new house while I fix it up. That way there isn't a rush. I could also remain in the new house if I like it enough. I just really like my current area and its hard to find reasonably priced homes in the area I want to live.

[Kierun]

Absolutely, it can be used to your benefit. I recently purchased a second property with a VA loan, the first property was refinanced under an investment loan and rented out the property. I had to write and sign a statement about why I was buying this second property with a VA loan and prove my intention to use it as my primary residence. I don't intend to stay in this second property for more than a few years and will eventually rent it out if the numbers work. I was just commenting that looking to sell the property after 60 days likely won't pass the lender and VA bulls*t test so you'll probably need to modify the approach. Your idea to live in and fix the second property will probably fair better than trying to flip it in less than 60 days.  If you plan to rent out the first property your DTI ratios will be affected due to how they calculate vacancy and how much of the rental income they'll include in the equation.  They will also want to see a signed lease in hand with the tenants and often would like to see that you have a history of experience as a landlord, which could complicate things for you.

[epps]

You're right @Kierun. VA loan financing with intention to flip isn't legal. I didn't realize that in my fervor when writing my post. However, I do think there may be a way to utilize the VA loan legally. Mainly by intending to live in the home with the VA loan.

My second idea was to do a live in fix and rent out my current house or sell it. I wouldn't mind living in the new house while I fix it up. That way there isn't a rush. I could also remain in the new house if I like it enough. I just really like my current area and its hard to find reasonably priced homes in the area I want to live.

You can do similar things to what you are proposing and be fully within the rules with the VA loan. A potential issue in your case is that if the houses are in the same city lenders or the VA may balk unless there is a compelling reason for moving in to the second property (closer to work, family gets bigger or smaller etc., improved finishes etc... harder to justify that one if you are intending to rennovate) while using a second VA loan without refinancing out, so you may need to go through several lenders before finding the right fit. You can't structure it as a "flip", but you can work on a longer timescale (a year has worked well in other cases I have seen, and some lenders will have a one year occupancy requirement expressly written in to the loan documents anyway when they generate VA loans, which is above and beyond the VA's requirements). Keep in mind if you intend to do this multiple times, different lenders will require a different amount of address history and could want explanations for why you move so often/ may shy away from high turnover and VA loans. The last thing to keep in mind is that, unless you or your spouse qualify as disabled veterans, the funding fee will be significantly higher (up to 3.3 or 3.5%, I can't remember) for all subsequent uses of VA entitlement, which puts you in a negative 3% hole off the bat and significantly increases closing costs or puts you 3% underwater on the day you move in if you roll it in to the loan.

There is no hard and fast rule and it often ruffles some people's feathers to discuss creative plays using VA loans. As long as you play by the rules the VA sets and your lenders set and don't commit fraud etc. then I don't see the problem. My VA purchases have been in different areas though, so I haven't dealt with the specific circumstances you are navigating.

[Valvore]

UPDATE: We are in the midst of a refinance. Currently in the underwriting process for a 3.875% rate with points (0.92% = $1,800) Total closing costs w points is $4,000. Monthly payment drops from $1,007 to $930

This new rate is above my old rate of 3.75% but now I will have my VA loan free. Just in case I find a duplex in the future that would become my primary residence. It will probably be difficult to explain to an underwriter why are looking to buy within 1 year of refinancing, but we aren't in a rush to purchase. I hope we can at least have 6 months before we find a place we are interested in.

Does anyone know of predatory lenders (kidding but not really) that are willing to provide VA loans with less hassle? It's really annoying how the underwriters are being nit picky in this refi... Like I have a 62% LTV, 5% Debt to Income Ration (excluding mortgage), 10K Cash on hand & 100K in retirement funds, AND a 780 credit score... I am a stellar prospect!