Is using the VA Loan actually worth it for investing?

20 Replies

The benefit of the VA Loan is that can you put can out zero down, but that means higher monthly payments and near zero cash flow. It also means that a majority of your payments are going towards interest and and not principal and equity. In my market at least, a lot of the bases have pretty stagnant prices and do not appreciate much over the years. Is buying a $150,000 duplex with rents of $750 a side even worth using the VA Loan for? The way I see it is that it takes forever to build equity with little appreciation. Is there something that I am missing?

VA loans have far better interest rates than other loan types. I am able to lock in an interest rate below 3% currently. A hybrid VA loan is another consideration to gain an even lower interest rate and just refi before the ARM portion of the loan takes effect.

The property would make sense as long as the numbers work. Get a quote for insurance, determine the taxes via CAD website, and negotiate an interest rate that makes the property make sense with the lender. 

The VA loan was never meant for investment purposes and is a great resource for military personnel to gain access to a primary residence with little money down, as a large majority of us have little money coming out of service (Buying mustangs and expensive things we shouldn't have).

Hi @Patrick Y. ,

Are you sure you can use a VA to buy an investment property? I thought it was for primary residences only.

If you can buy it with a VA loan. Shop your insurance with a broker rather than going to USAA or your Auto insurer. A broker should be able to find you a much better rate. That will make your cash flow look a little better.

You can still put money down with a VA loan, and keep the low rate and no PMI to improve your cash flow.

You can also pay extra per month towards your principal to build equity faster. 

A VA loan can be used for a primary residence only

Though it can be used for a multifamily (4 units or less) if you are going to live in it.

You can also rent out a home that was purchased with a VA loan after living in it for a while (for example, you might do a tour at one duty station, then rent the home when you transfer to another unit)...but this ties up your VA loan benefit...it's possible to buy a second primary residence with a second VA loan while you still own the first...but it's complicated.

When you sell or refinance out of your VA loan, your benefit resets.

I'm a veteran myself and have used my own VA loan benefit twice, and closed multiple VA loans as a realtor on both sides of deals. I'm also a certified Military Relocation Professional, which includes a heavy dose of VA loan training.

Hope that helps!

@Tom Parris  @Jeff Copeland The plan is to live on one side of the duplex for a year before moving and renting out that unit as well. I have the ability to put down a down payment for the duplex but was more wondering if there was any other benefit to using the VA Loan. From the comments so far, it seems like VA Loans get better rates. Would it make sense to use the VA Loan and still put down whatever I am able to towards a down payment?

Probably best to talk to your mortgage lender... It really depends on what other loan products are available to you, how much of a down payment those require, and what interest rate in payments you're going to get with those... as well as any future plans for possibly needing your VA loan for a primary home purchase. The low/no down payment is the primary benefit of a VA loan.

Think longer term, can you value add to this duplex? If you buy cheap enough (say 10-20% discount from market) then you'd have equity and no money down. If you have the money to put down what about using it for something else (investment property, save it etc). Maybe you could buy a place cash in couple years.

To me, cash better than equity in a house I'm not selling....

VA loan is a great tool!

0% down is always awesome when you can get it. If the property doesn't cash flow well because of the debt service, it's not the fault of the debt service, the deal just isn't that good.

I invest at military bases (ft Bragg) and you're right that we don't get appreciation, but there is lots of cash flow to capture!

@Patrick Y. I'm a 20 year Vet and have never used my VA loan. I have not seen where VA loans get better rates, in fact I find just the opposite. That said the benefit is not having to use a down payment. You will have a higher payment no doubt. Unless you plan on living 5 years or more in the duplex, I might not make the investment and here is why.

I live in Austin, but compared to Killeen (Ft Hood) there are better buys at the post city.  However, proceed with caution as even your post warns you.  Prices are slow to appreciate and rents will be stagnant.  Why?  

Precisely because of the VA loan. Just about every solider qualifies and a lot of soldiers buy when they are not in good financial position to do so. Then the soldiers rotate out about every 3 years. This cause them to either sell which is hard to do because they have to pay a realtor 6% so most will take a loss. So the other option is to rent it out, which a LOT OF SOLIDERS choose to do so. This causes property values to stagnate and rent to stagnate as well.

Now why do I say if you can live for 5 years in the duplex then maybe a buy is a good thing.   Because it allows you to get in the housing market, if you are a solider you make good use of your housing allowance, which is better than renting.  5 years give you a little opportunity to see rents rise a little, gives you the opportunity to take some of your housing allowance and apply it to the loan early.  If your aggressive you might be able to pay it off in 15 years and now your in good position to handle any downturn or stagnation that might come. 

Remember if you move in a year, you have to add to your cost, property management, and I have yet to find a good property manager.  I think that you would be put in a vulnerable position being just another solider renting out his property as he is deployed or transferred overseas.  Lots of issues to dodge.   I love duplexes, but building a portfolio while in the military is a tough thing to do.  Just my two cents.......good luck.  

BTW, I just assume your in the military since you said you would be moving in a year.   

@Alexander Felice . Point taken, maybe the deal isn't as great as it seems.  How much cash flow do you look for if you're putting 0% down? 

@Joe Scaparra , thanks for the insight.  I did factor in the cost of property management, expenses, and maintenance.  I feel like rent in the duplexes in the Killeen area will hover around and remain in the $800 area.  Your post does make me realize that if I am not cash flowing, I would have to hold on the property for a quite a while before I sell to break even considering closing costs.  

@Patrick Y. @Joe Scaparra both you and joe are right. Finding a property that will cf at 100% financing with a Pm (after you move) is tough. I can also see joes point about trying to build a portfolio near military bases. Now add something else. Suppose the military decides to have a reduction in force at a particular military base. What happens to the value of your 100% financed property. Just like that overnight the value falls and you are underwater. That's no problem if it's one of say 10 properties spread out over a large area. If it's your only rental / property and your stuck making payments and paying expenses on a house you can't sell for enough to pay the loan off that SUKS. Been there done that. Use extreme caution when investing like that. Your business like a house is no better than its foundation and if it's based on too much leverage it can fall pretty easy. Safer to buy using some down payment. Use your va loan later for a primary ( it's designed use). Remember the tenant not you pays the interest. If your trying to pinch penny's on a difference of 1-2 % interest your working too close to the wire. The average investor re-finances every 7 years or so. If he doesn't re-finance he will do a 1031 or sell or somehow end the loan. An IRR calculator will show you the best time to make changes with your investment. The type of properties I buy usually indicate I need to sell or re-fi every 7-10 years. RR

Not exactly sure if anyone’s mentioned this yet, but don’t forget about PMI (Private Mortgage Insurance). You’ll have to pay PMI anytime you finance at more than 80%. This could be a cash flow killer, but like others have mentioned, if the numbers still work out, I’d go for it.

I haven’t used my VA yet either but I think the best thing you could doing trying to use the VA from an investment perspective would be to purchase a 4-Unit, and house hack it for the minimum owner occupancy time period. This gives you the greatest economies of scale when it comes down to things like insurance or other mandatory bills.

Also, you’ve got like $417K eligible to use in total for the VA loan, so finding a decent 4-Unit may not be out of the question depending on your location.

DO NOT buy a Mustang. 3% of the time is a vehicle actually an asset. I see so many people driving around base in very nice vehicles. Debt doesn’t impress anyone.

Originally posted by @Patrick Y. :

@Alexander Felice. Point taken, maybe the deal isn't as great as it seems.  How much cash flow do you look for if you're putting 0% down? 

@Joe Scaparra , thanks for the insight.  I did factor in the cost of property management, expenses, and maintenance.  I feel like rent in the duplexes in the Killeen area will hover around and remain in the $800 area.  Your post does make me realize that if I am not cash flowing, I would have to hold on the property for a quite a while before I sell to break even considering closing costs.  

 I don't go by one specific metric. If a deal can add to my overall strategy with cash flow, equity, or appreciation I will consider it. I try not to put myself into boxes that limit my opportunity such as "a deal MUST cash flow X".

That said, if after short and long term expenses I'm negative, I don't ever need that deal.

You do not have to pay PMI when using a VA backed loan even with 0% down. The catch is there is a 2% funding fee( unless your 40%+ disabled), so if you're doing a short term investment that's a high price to pay for zero down.

What is your end goal and what is your timeline, Patrick? If you're near retirement and need cashflow now, then yea, using the VA Loan to get into a property with 0% down to turn it into a rental once you transfer probably won't work out. If you're like me, though, and have ~15+ years to go before you'd need the cash flow, the numbers could work out, even if the cash flow isn't there right now. The concerns Joe and Ralph laid out above merit consideration and you'll have to take a look at those factors for your market; I'm just going to look at the numbers side.

You mentioned a $150,000 duplex that'd rent for $750/side. I'll be conservative and use a 5% interest rate for both a 0% VA Loan and a 20% down conventional mortgage. I'll also use the 50% rule of thumb and say 50% of your rent will cover expenses, leaving you the other 50% to cover debt service. That's been pretty reliable in my ~3.5 years as a landlord, but your mileage may vary based on the property you purchase and its condition. We'll use it as a rule of thumb, as I'm more concerned about illustrating the general thought rather than getting bogged down in the details.

VA Loan: 0% Down

Rent: $1,500 (we're considering the numbers after you've made it a full rental)

Expenses (50%): $750

Mortgage Payment: $805.23

Cash Flow: -$55.23

20% Conventional

Rent: $1,500

Expenses (50%): $750

Mortgage Payment: $644.19

Cash Flow: $105.81

Putting 20% down cashflows so it's the better option, right?!? Not so fast.  Sure, now you net $100/month instead of shelling out $55, but you needed to tie up $30k in order to do that.  If you can cover that $55/month as your tenants pay down the mortgage balance, it'd take 543 months (over 45 years) for that $55/month to total up to more than the $30k you put down for the other loan.  You'd also have that $30k to put toward another rental, make repairs to the duplex in a value add play, or invest elsewhere.

Just like when constructing a stock portfolio (hoping I don't open a "stock market is evil!" can of worms with that analogy haha) You have to look at how this property fits into your overall portfolio to see if it makes sense.  Maybe it does, maybe it doesn't - it'll depend on the property and the market.  The other factors mentioned in the posts above are all valid: you need to do your homework on the area, the tenant base, its future prospects, all that jazz.  Just don't lose sight of what your end goal is: (which, I'm assuming) cash flow and equity at retirement.

@Kevin Touw Thanks for the in-depth analysis, definitely a lot to consider.  I never thought to consider how long it would take to make up for a down payment in terms of negative cashflow.  My goal is to eventually build a portfolio of cash flowing properties and/or appreciating properties.  I'm 30+ years from retirement age, but wouldn't mind retiring early!

Two advantages of a VA loan:
1. No money down
2. You do not have to pay property mortgage insurance as in a conventional loan which will probably save you over $100.00 per month.

Disadvantages:
1. You have to pay a fee that is rolled into the loan which I think is 3%.
2. You can not use it for investment properties unless you live in the property.
3. You can do a 100% cash out refinance with a VA loan.

In your situation I would use the va to get into my first investment property with zero down while you live there.
Then I would take the cash and put down on a second rental property with an investment property loan.
I would then cash out refi the duplex with my VA loan in a year or so and pull out the equity to shop for a third investment property.

Just a clarification for @Marshall Leipprandt that @Michael Bettencourt already touched on - 

VA loans do not have PMI (The $100+/mo primary mortgage insurance that conventional and FHA loans have when the loan amount is higher than 80%). The DO have the funding fee, which varies depending on your disability, service status, whether or not it's your first VA property, and your down payment.

On the down payment questions - that is a reason it might be worth having a down payment with a VA loan, even though you don't have to. At 5% and 10%, your funding fee is slightly reduced.

https://www.benefits.va.gov/homeloans/documents/do...

If you are as high as 20% down payment, though - it probably makes sense to do a conventional instead of VA. The rates are generally comparable, there is no funding fee OR PMI, and you save your entitlement for later.

Ultimately, I agree with @Kevin Touw 's analysis, which is reasonably close to the same numbers I worked out on the deal (our taxes in Killeen are pretty high, so the negative cash flow could be as much as -$150/mo early on). When deciding whether or not to make a down payment, the math is fairly simple: could your money be doing something else to make a better return than the interest rate?  In this example, if the interest rate is 5% (probably closer to 4%, but just to use Kevin's example), is there anything your money could be doing instead that earns a better interest rate? If the answer is yes - then skip the down payment and put your money to work elsewhere!  A conservative ETF or index fund should do better in the long term than 4-5% (thought the market at the moment seems to be a little bit bloated).

Thanks again@Brian Adams . I'm think I'm starting to wrap my head around this. While negative cash flow isn't ideal, I don't think its necessarily a bad thing while using the VA Loan considering the eventual return and how little money I put forward comparatively. It also makes a lot of sense that money not spent on a down payment can be put towards better investments. Yes, a majority of the mortgage will go towards the interest, but I guess it's not as bad if tenants are paying it.

@Patrick Y.

Yes, and as when we did the math - duplexes are going to have the lowest return, but are arguably a little safer than fourplexes and also might arguably have more future cash flow potential than a SFH (two units' rents rising instead of just one).

But a SFH foreclosure is probably still one of the most interesting ways to go if you can't find a good fourplex. Can get closer to cash flowing, and almost certainly can start with a chunk of equity, unlike the other two options. And there are plenty of foreclosures in the Killeen market of all shapes, sizes and quality. The most expensive deal I did in 2015 happened to be a $250,000 foreclosure, ironically. (not suggesting you target that end of the foreclosure market, mind you).

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