The current Coronavirus pandemic leaves a lot of questions about the effect on the real estate market. But, one common opinion is that multi-family investing can offer a reprieve from economic disturbance for real estate investors. The reason is that multi-family properties offer less risk due to having more than one unit.
How Can You Finance Multi-family Homes with a VA Loan?
What most people don’t know—is that you can purchase multi-family properties with a VA Loan. It’s an incredible opportunity for seasoned investors or even first-time homebuyers, so make sure you don’t pass it up!
Multi-family Homes Research and Analysis
When you’re researching properties to purchase, know your costs! Your mortgage payments include principal, interest, taxes, and insurance, but that’s not all you need to consider. It’s important to also include factors like utilities, estimated maintenance costs, vacancy, capital expenses, and property management. Having more than one unit means an increase in all of these!
You need to know your potential rents. This helps you (and your lender) determine if it’s a good purchase. Location is a huge factor in rental amounts, so make sure to research locations.
First, to finance a multi-family property with a VA loan, the borrower must occupy one of the units within 60 days of closing. This is the same rule that applies to single-family homes. Even though you are required to live on the property, the opportunity lies in renting out the remaining units to cover your mortgage payments.
If there's one veteran borrower, the property can only have up to four units. So, if you were thinking about doing a VA loan for a 100-unit apartment complex--that's not possible, but there’s a way to add more units. By using a Joint VA Loan, two veterans can purchase a property together. Because it's two borrowers, the VA allows for six total units. This includes four residential units, one business unit, and another unit that is joint ownership.
Per the norm, the VA requires the property to meet minimum property requirements to be financed. These minimum property requirements ensure that the property is safe and livable. One of these requirements is that each unit must be private and accessible. Shared water, sewer, gas, and electricity are okay provided:
• The property has separate service shut-offs for each unit.
• There are easements/covenants protecting water connections and VA approves of that agreement.
• Ensure the units have legally protected access to utilities for repairs (even if it’s passing through other livings spaces).
• Shared spaces like laundry and storage are permitted by the VA.
VA Loan Application Process for Purchasing Multi-family
Though the process can be similar to using a VA loan for purchasing a single-family home, there are some differences. Unlike single-family, the VA can allow rental income from vacant units to be considered, but you must prove:
• That you, the borrower, are an experienced landlord/manager using one of these criteria:
o You must have owned multifamily in the past.
o You have prior experience managing multifamily.
o You have prior experience collecting property rentals.
o You were previously employed for any property role.
Once you have provided relevant documentation to prove one of the above roles, the VA will apply 75% of future rental income to the total income consideration. To use future rental income, signed leases must be in place before closing the loan.
Other Considerations When Purchasing Multi-Family Homes with a VA Loan
Although the cost of a multi-unit inspection may be tempting to pass on, borrowers should have an inspection done on the property during escrow. Having an inspection will provide information on any issues with the property, which can help you make an educated decision on your purchase and may assist with price/contract negotiation.
Using your VA loan to purchase a multi-family property is a great start or addition to your investing journey. Once you PCS to another duty station, you can rent out all units to generate more income. You can quickly build your portfolio and have less financial risk--it's a win-win!