Using your VA loan as an investment
We sometimes get asked by our loan candidates about if they can use their VA loan as an investment. While the answer to this question depends on what you consider an investment, I can share how I used my VA loan as an investment.
The VA loan can be used to purchase up to a 4-unit house so long as it is owner occupied. These homes are also known as multi-family dwellings, and can be referred to as 2, 3, or 4 family houses. These homes are typically separated units with each functioning as a separate apartment.
In 2008 I used my VA loan to purchase a 3-family home in Massachusetts with 2 out of the 3 units rented out at $1,250 per unit for a total of $2,500 per month that I was collecting in rent. I moved into the 3rd unit and my monthly principle & interest, taxes, and insurance payment to the bank was approximately $2,700.
Through this arrangement I was able to own a home and only pay $200 ($2,700-$2,500) a month towards my monthly payment. This gave me the opportunity to have my tenants pay down my mortgage while I lived almost free in my home. Fast forward to 2012 and I now live in another home but still own the 3-family and have it fully rented out and clear over $1000 a month in rental income after accounting for my fixed expenses.
Below are some basics to consider. It is important to note, though, that being a landlord is an entirely different topic and not for everyone. Also, like most investments and being a homeowner, there is risk, so it is important to do your homework.
- Identify the area you are interested in buying: If you are interested in generating rental income it is important to look at areas that have low home values with higher rental amounts. The lower the cost of the home the lower your monthly payment amount. The higher the market rents are in the market then the more that your tenants will contribute to your payment and more of your money that you’ll keep.
- Start looking at homes: Any realtor can set you up with Multiple Listing Services (MLS) updates based on your criteria that you tell them. Also, a good realtor knows markets that would best suit your criteria and can guide you in were to start looking. You tell them the area that you are interested in looking at, your price range, and types of homes (single family, 2, 3 or 4 family units). Then, you will start getting emails with homes that meet your criteria that if you want can start scheduling a viewing.
- Know your costs: The amount that you will be paying monthly is your principle, interest, taxes, and insurance is what you should focus on. You can use VA Loan Captain’s Payment Calculator and input different scenarios to see what your payment would be. There are also other costs such as water/sewer that I typically allocated $100 a month for. Also, there are costs for maintaining any home single or multi-family which you will need to consider and depends on the age and condition of the property.
- Know your rents or potential rents: You can ask your realtor what the average rents are in the market that you are looking at. For example if average rents in the market for 1-bedroom apartments are $1000, and the units in the multi-family home that you are looking is average to what is available market, then you can use that to determine what you could charge if the units are vacant; or, what you could charge if there are tenants already in but paying a lower amount.
- Other considerations: If you go this path you will be a landlord which is something that is a small part-time job and not for everyone. Having some basic knowledge on appropriately screening applicants and knowing the state law will go a long way. Basic items for screening applicants include doing a credit check and collecting and calling references.
Overall, using a VA loan to purchase a multi-family was a great experience that has now set me up with a solid cash flow positive investment. While this was beneficial, it required a lot of work and learning along the way.
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