Low or no down pmt for VA mortgage.
I am looking to purchase a 4 unit apartment complex and living in one unit. I can get a VA loan with 0% down, which does not increase the interest rate. I am use to thinking that I should put a good down payment down. However, I am wondering if I should go with the 0% down and just have either a higher monthly payment or add more years to the mortgage and save my cash? I do own two other duplexes with conventional mortgages and pay more each month on the principal to pay off earlier. Any advice would be appreciated!
You can certainly always opt for a larger down payment.
The other strategy is to keep that down payment money in your pocket, and make your equity move via improvements to the property.
Non-veterans are forced to make their equity move in the form of a down payment. As a veteran, you have this choice to make.
I would suggest considering both options once you've identified your property. Not all properties will present equal opportunity for improvements to be a solid equity move.
Incidentally on a property where you will be renting out other units, such an equity move will also have the added benefit of commanding higher rents.
Increasing your down payment by $10k will decrease your monthly P&I by about $50. If you can identify $10k of improvements that will hike rent by >$50, that's probably the move to make because it'll pay for itself each month and of course the equity.
Thank you for your idea/advice! This complex has 1 coin-op washer and dryer for 4 units, which brings in $100/month. I wanted to save up and invest in another coin-op washer/dry set thinking it will bring in another $50/month. I'm going to take your advice and do the 0% down and buy another set sooner!
I am a HML and I am sure you know that if you came to me to borrow some money to flip a house you would be paying at least 10% plus few points, which means money would cost you between 12% to 14%. From your post I can see that you are experienced investor and that there is a good chance that in near future you would buy another duplex or maybe flip a hose. Now, let me make some assumptions about your proposed four-plex purchase. Assuming that purchase price is $200,000, with 15% down payment ($30,000) and 4% loan you monthly payment would be $811 per month. With zero down and 4% loan you payment would increase to $955 per month. Now, let's assume $144 difference actually causes you to have $1,728 yearly negative cash flow. If you stopped making higher payment on your 2 duplexes you could probably cove $1,728 negative on your new fourplex. However if that is not the case put a side two years reserve of $3,456 and go flip a house or two with remaining $26,544.
REMEMBER, THIS IS VERY CHEEP MONEY THAT IS BOUND TO DESAPEAR!!!!!!
You are on your way!
Good luck,
George
Originally posted by @Kathy Mckee:
Thank you for your idea/advice! This complex has 1 coin-op washer and dryer for 4 units, which brings in $100/month. I wanted to save up and invest in another coin-op washer/dry set thinking it will bring in another $50/month. I'm going to take your advice and do the 0% down and buy another set sooner!
Wait, I'm not sure I follow your logic.
If Sally does laundry once a week, all the number of washing machines does is change when during that week she does her laundry because she must wait for Joe's laundry to finish.
Are you thinking that you'd charge more for washer #2, and expecting that people will pay a reliability premium - "F it, I don't want to wait for Joe's to finish, I'll pay the extra two quarters"?
The issue I see with going the VA route is in the type of property you could get. My understanding is that the VA has very stringent standards and inspections, which would make it difficult to impossible to purchase the type of distressed property where you could do some forced appreciation value add. This leaves you with more turnkey rentals at retail price ... if that is what you want to buy anyhow, then no problem, but if you are looking at getting a distressed property for under market value with a VA loan, that could be a problem, unless you have an evil genius mortgage broker like Chris M. that could figure out how to make the darn thing close escrow :)
I think Chris is on the right track with the washing machines increasing value/profits - unless people are waiting/unable to do their laundry currently, resulting in them going somewhere else off the property, then you'll only provide them the option to wash their clothes different days during the week, not necessarily MORE times that week. Now if they want to wash more clothes, more times throughout the week, but can't due to capacity, then that may work.
Either way, the increased profits/income for the money spent on machines, doesn't seem as appealing to me as a property improvement costing $10k that could potentially increase the equity by $20k or more (if possible with your property's quality / status, like what David Faulkner mentioned).
Hope that input helps
With rates where they are, my opinion is that the down payment doesn't do much for you, and that the cash in your pocket is more liquid, safer, increases your tax benefits, and probably has a better rate of return. Invest it, keep it. If there was a multiplier, i.e.: reducing the loan amount to below 417K, that is one thing. But without anything like that, I would keep the cash accessible.
That is my advice for 9 out of 10 clients after analyzing the numbers.
Daniel Lehman
VA Expert/Advocate
I was thinking the same thing for the washer/dryer. I don't think that having one per 4 units is adequate so I'm guessing after a few times of going to do laundry and they're full most people just go to the laundromat.
Also, I was thinking the same thing for the down payment. I'm not see as much financial advantage to putting the down payment so it would be less risk and more advantage to keep it...perhaps even pay off sooner but keeping it for now I think is the best bet!
Thank you all for your input and advice...much appreciated!