Able to leverage 100%, but should I?

37 Replies

Hello everyone! I hope y'all are enjoying your day. I would like some advice. I am able to get a VA loan and buy a house with no money down. I was originally thinking about using an FHA loan so as only put 4% down, but now I'm wondering if I should go that route. If I do I have to wait for a while in order to save up money for the down payment as well as any rehab money and closing costs. I would be purchasing a multi-family so that I could house hack.

What would the pros and cons be to using my VA loan and not putting any money down? I would think that it wouldn't be a good thing to be 100% leveraged, but it would definitely get me started on my REI journey sooner. Please let me know what you think.

If it's for your own personal residence I see nothing terribly wrong with it, assuming you are fiscally responsible and stable. If it's for an investment, I wouldn't recommend it, particularly when the market appears to be peaking.

Originally posted by @Nathan G. :

If it's for your own personal residence I see nothing terribly wrong with it, assuming you are fiscally responsible and stable. If it's for an investment, I wouldn't recommend it, particularly when the market appears to be peaking.

 I would say it's the exact opposite.  When you leverage your own home to the max, you are putting it at risk because you are responsible for the source of the payment money.  The higher the debt service, the higher the demand for an outside source (income) to cover it.

When you leverage your rental to the max, and it cash flows positive (that's critical), the source of funds to make these payments is the tenant.

@Nathan G. and @Joe Villeneuve , I've just edited my post. I forgot to include that I plan on buying a multi-family for the purpose of house hacking. So it will be both my residence and an investment. Thank you for your responses, they've given me a lot to think about. 

@Cosette Trantow Compare the mortgage insurance costs and closing costs between FHA and VA loans. That may drIve the FHA vs VA decision. Putting down 4% is next to nothing, so for me that wouldn’t be a determining factor. You may be better investing that 4% after the purchase to create value add. If you finance 100% of sale price and do a 30 year loan, you won’t pay the principle down far enough to cover 6% realtor commission to sell for 3+ years. If value goes down it gets worse. Set aside savings and/or pay down principle with this knowledge in mind.

As mentioned earlier in the thread, this is a personal preference.  In general, I'm pro leveraging when someone else is paying the debt and you can take that money that would have gone into the down payment and use it to acquire/scale.  However, if you don't have anything in reserves (which your post alludes to) than I would definitely be hesitant to be that aggressive.  If you can't cover a 5k emergency, live for half the year without a tenant, or wait out a 10-20% dip in the market, you are probably being too aggressive. 

One other side note as I'm not a mortgage expert, but I thought even though a VA loan is 0% down, you do have to pay closing fees out of pocket. These fees can range from 2-5% so at the end of the day you're almost in the same boat as the FHA loan where you have to put 3.5% down but can roll in closing cost (I know there are other differences between the two loans such as PI and diff rates, but I'm just focusing on the down payment aspect of the loan). Anyone actual mortgage brokers feel free to chime in here.

@Jeff Ronningen I didn’t think about comparing the insurance and closing costs. Thank you. 

@Tom Shallcross There's a lot of great information in your post. I didn't know you could roll the closing costs into an FHA. I definitely don't have much in reserves so you've confirmed what I was thinking. I appreciate your help.

When you live in the property, there's a greater incentive to keep it. Lose the property and you end up on the streets or, even worse, in an apartment! LOL!

If it's an investment, there's a higher likelihood of financial loss due to vacancies, unpaid rent, property damage, etc. You could also have change in the rental market, economy, or other factors that reduce rent income and make it harder to afford. If it's strictly an investment and it starts costing you money, it's easier to walk away.

I see what @Joe Villeneuve is saying but I'm of the opinion it's much riskier to fully finance an investment, particularly during a peak market where there's a good chance things will go down before they go up.

@Nathan G. That’s pretty much what I was thinking as well; I guess I was hoping that I would hear something different just because it would be easier for me to start investing. I guess I’ll have to work hard and do it the right way. :)

Originally posted by @Nathan G. :

When you live in the property, there's a greater incentive to keep it. Lose the property and you end up on the streets or, even worse, in an apartment! LOL!

If it's an investment, there's a higher likelihood of financial loss due to vacancies, unpaid rent, property damage, etc. You could also have change in the rental market, economy, or other factors that reduce rent income and make it harder to afford. If it's strictly an investment and it starts costing you money, it's easier to walk away.

I see what @Joe Villeneuve is saying but I'm of the opinion it's much riskier to fully finance an investment, particularly during a peak market where there's a good chance things will go down before they go up.

 Ok.  Let's play this out.  Let's say you are fully leveraged, and the market goes down.  I'm assuming this property is, and has been, cash flowing from the start or you don't leverage it.  Hey, you don't buy it in the first place.

So, the market goes down, and you are still cash flowing.  Where is the risk?

@Joe Villeneuve we don't know the market or the future. What if it's cash flowing $100 per unit but the market becomes saturated, the economy slows, and rent rates drop $100 a month per unit? At the same time, the roof starts leaking a d will cost $8,000 to replace. Then the tenant in unit 3 fails to pay September rent, it takes two months and $1,200 to evict, and it takes another $4,500 to cover cleaning and repairs a d lost rent. If you've been in the game a while, you've probably dealt with similar scenarios. A seasoned investor with a healthy reserve and a large portfolio could ride it out. The vast majority of new investors would be sunk. I'm not saying you can't do it; I am simply saying it's a high-risk investment for a newer investor.
Originally posted by @Nathan G. :
@Joe Villeneuve we don't know the market or the future. What if it's cash flowing $100 per unit but the market becomes saturated, the economy slows, and rent rates drop $100 a month per unit? At the same time, the roof starts leaking a d will cost $8,000 to replace. Then the tenant in unit 3 fails to pay September rent, it takes two months and $1,200 to evict, and it takes another $4,500 to cover cleaning and repairs a d lost rent. If you've been in the game a while, you've probably dealt with similar scenarios.

A seasoned investor with a healthy reserve and a large portfolio could ride it out. The vast majority of new investors would be sunk.

I'm not saying you can't do it; I am simply saying it's a high-risk investment for a newer investor.

 First, if the property is only cash flowing $100/month, why would you buy it?

Second, if all of those disasters happened as you said, they would have the same impact on a property that was fully or partially leveraged.

Third, risk is defined and based on the "who is at risk, what is at risk, and who is the risk".  In all cases, it's the cash that is at risk.  To know who is at risk, and who is the risk, just follow the direction of the cash that is at risk.  It will always point from the "at risk", to "the risk". 

Joe, I said "per unit" because she updated to say it would be a multi-family.

I'm giving my personal opinion based on my experience and the limited information provided. If you think it's a great idea, you can just say so and move on.

Absolutely leverage 100% with the provision you have adequate cash reserves. Cash reserves being the deciding factor. Without that you are throwing the dice and we all know the house will usually win. 

Assuming the property is affordable there is no reason not to go forward as a house hack with those reserves. With the reserves there is no reason to need to put anything down since you are simply holding back the DP. This all assumes it is a good investment in regards to meeting the minimum 1% rule fully rented.

Zero down, cash reserves, cash flow. It is the perfect investment scenario.

@Cosette Trantow It depends. You said this is going to be a house hack multi family. Is this at 100% levaeraged work numbers wise? Meaning after the 2 year period the VA requires you to be in the home and you move out. Does the math work. Some things to think about. - do you have to pay the funding fee? (10% disabled or more it is waived) - what’s your long term goals? - how much of the entire mortgage is paid for by the other tenants? Is this a 2/3/4 unit? A VA loan is a great way to start. Just make sure the numbers work to what you need for your personal strategy.
Are you considering a duplex? 4 plex? I’d look for quads. More doors. More cash flow. Still considered residential by lending standards to use the VA loan. Live in it the year the government requires move out and then you’ll have even more money coming in.

Need actual numbers to make a decision, at minimum:

- What is expected market rent for each unit (including one you plan to occupy)?

- Loan details, most importantly monthly payment, loan amount, and interest rate

Leverage doesn't determine whether or not your investment will be a success, all it does is amplify the success or failure.  If it's a great deal, lever that sucker to the moon.  If it's a mediocre deal, it doesn't hurt to lever less to protect yourself.  If it sucks, you should lever nothing and pay nothing because you're not going to buy the deal.

@Frank Jiang I don’t have a property in mind yet, but I understand the point. I think I’ll just keep on my path, saving money for a down payment, to put myself in a safer position. Thanks for your advice. 

Originally posted by @Cosette Trantow :

@Trey Crusey I’m considering a 4 plex if possible. I want to start out as big as I can. 

Please leverage 100% or 4% FHA. However, if this is your first time, start small with a duplex. Best to learn to walk before running? Make sure to run the numbers or post here for people to look over

If you plan on holding and treat it like a business (save CAPX, vacancy, etc), leverage 100%!  

VA loans are powerful! Ask for 3-4% CCA and actually get money back at closing. I say go 4-plex only because I like to maximize potential and learn in the deep end.