Hello team. Total newbie here....been renting my entire life and finally (at 33 yrs old) realizing that my military Basic Allowance for Housing (BAH) could be building equity and become a rental property instead of being put in someone else's pocket. I have been pre-approved with Quicken currently but will check with USAA as well for their VA loan offer. I really just want to start small (no 10x rule for me...) as I am so new to this (and terrified of this market). Seeking a 3BR/2BA single detached home near TierraSanta that I can turn into a rental after I transfer out of San Diego. I have read the BP beginners guide to REI, I read RichDad/PoorDad, and currently reading Home Buying for Dummies. SO much information to absorb but I can't put these books down! E-myth and Accounting books are next...
Any advice or suggestions are appreciated.
Welcome to BP! I am a former California native, from Monterey. Now I am a 20 year LCDR, looking at my exit strategy.
Hints from a former newbie:
1) VA loan is an awesome tool. Use it live there for a year refi out. If you can stand a duplex try it ( currently doing that in DC).
2) Brick and mortar banks will beat Quicken, they just do not work the hours they do. US Bank, Navy Federal, wells Fargo ... Shop around for your interest rate! Call them on lunch, be ready to email, and scan your way to financial freedom.
3) Get organized, this is a business you are about to undertake in. Buy a small file cabinet and get your last free years tax stuff, LESs, monthly bank statements, and soon HUD-1s and stuff all it in there.
4) Save for your first one, but refi for your next couple! Use OPM until the banks say no, then use OPM without banks.
5) Apps I use daily: Zillow, trulia, genius scan, and of course BP.
Good luck, hope to see you with your first buy next year.
Great thing about the VA loan is $0 down and lower interest rate. I used mine to buy a 4-plex. Lived in one, and my tenants paid the rest of my mortgage and costs. With the high VA allowance in the SD area, I'd recommend doing the same. Take a serious look at multi-family homes (VA loan allows you to purchase up to a four-unit property). Doing the same thing without the VA loan or being owner-occupied would cost you 25% down, and 1% more in interest.
SD allows $613k for VA loans, so start there. Look at the other topics here on BP, and try and follow most of the rules they list. The 1% rule for the purchase price would be a starting point, so for $600k, your unit would have to bring in about $6k/month in rent for all of the units (assuming all were full, and you paid rent yourself).
Single family homes in high-priced markets are just really hard to break even on once you move out. I live in DC now, and haven't bought here because I wouldn't be able to rent my place out for the total costs if I PCS. That, and whenever you have turnover, that large mortgage payment is a real kick in the pants to pay yourself. A $600k mortgage is about a $3500/month payment. With a multi-family, you only absorb some of that at a time when you have turnover.
@David Frey Thank you for your service! As mentioned by others, the VA loan is a powerful financing tool to get started. I am a big fan of the MF space as opposed to SFR's but respect other people's desires for SFR's. Although our market is hot, vacancy rates are low (below 5%), interest rates on a presumed 30 year fixed mortgage are historically low (floating around 4.5%) and rents are increasing with the high priced housing market driven by a lack of inventory.
Unfortunately, TierraSanta doesn't have a lot of MF's but the surrounding areas hold possibility if you're flexible on your target market. Feel free to contact me with questions and best of luck.
Where do you report to work? If you can buy close to where you report to then other Navy folks will be around wanting to rent single rooms or units. I think National City of Imperial Beach are both great military rental locations but Mira Mesa could be good as well. Figure out how much you'll be able to get with the VA loan and let that dictate what you buy. Buy MF if you can but with SFH you will be able to rent our rooms to others in the military.
@David Frey the method that many of us vets talk about is using your BAH to pay for your SIDE of a property. Meaning, with a VA loan, you buy a duplex (or triplex), rent the other units and now you are MAKING money rather than just owning. The freedom of owning AND cash flow. And the VA loan is the only loan that you can use for a multi-plex property with 0% down. Take advantage of it while you can!
Welcome and take it slow. Sounds like you are doing it the right way... education first.
Hello David, I would get my real estate license as a purchase deal you could get 2.5% of the sale possibly. Also if you are around Chula Vista there is a Homepath house for sale. ($525k)If you used your VA on a 5/1 arm to purchase that would be about 2100 P&I, rent the other rooms to a couple of buddies as you are close to the base and beach. When you move or sell 5-6 years will most likely give you a good chunk of equity to use. You will have a hard time finding a MF at a good price that does not need re-hab or is in a livable area. The VA also has a one-time close construction loan SF only, this is a beautiful tool if you find a lot that needs a house, the builder takes all the risk and you just sign papers and get a key- if done correctly it would be a home run- I see on Zillow today a three lot sub for $183K in Chula Vista if you have other VA friends you might get a great deal from a builder.
@David Frey thank you for your service and welcome to BP. I think it is a great idea for you to purchase and use the VA loan program. If you can pick up a couple rental properties and then retire young from the military, you will find yourself in a great position at a young age. I have seen a couple other military people on BP that have purchased multiple homes as they have moved around. Sorry I can't remember their names, but they were doing well with the strategy.
Wow! I am impressed by all of the replies here. Thank you!!
I should have mentioned that I am married with 2 daughters (2 & 7)...which narrows down my options for location as we are already in a great school and don't want to change schools a 3rd time. I would love to take one side of a duplex but I do not see any 3BR/2BA homes and my wife would not settle for less (even with the promise of cashflow) and I would like to remain happily married! So, I agree with @Jack P. that I will not likely generate much (any) passive income with a SF once it is rented, however, I am giving $3100/month to Lincoln Military Housing right now and will be here another 2-3 years.
@Johnny Quilenderino, thank you for the tips and apps. I may reach out to you in the future for "Navy-life REI" advice.
@Casey Murray , thank you for validating my MF search in the TierraSanta area (I did not see anything either). So, I will take comfort in my lack of options. I may reach out to you later as well!
@Bruce May , I spoke with you briefly at the SDCIA meeting/seminar. Thanks for the sound advice.
@Ken D. , thanks for the tips on the VA loan options for construction...still so much to learn.
Welcome to BP. Never too late to get started. Thank you for your service. VA loan is great. I have someone that has been great w/ VA loans and is a quick closer if you would like another opinion. PM if you are interested. Otherwise, good luck on your journey.
OK, after looking at your post again my suggestion would be to buy a house in Terra Santa as close to the school your kids go to as possible- Wait for a foreclosure that needs paint and carpet, get an account at Home Depot to get an idea what you can do for a budget plus they have financing and a one year guarantee. Buy with your VA using a 5/1 or 3/1 Arm keeping your payment as low as possible, put in carpet and paint. Wait till you have some equity and use the VA 100% cash out option to buy an investment property in another location - High Desert or State. You need a house to live in and the tax write-offs, plus your wife will like you better.
Hey @David Frey
Welcome to BP and thank you for your service!
I think you are very wise to leverage the well-deserved housing benefits from the military.
Having said that, I would strongly recommend (for a number of reasons) that you speak with a lender/broker who's well versed in VA loans, rather than trying to go through an institution like quicken/USAA. I would be more than happy to recommend a few that I've worked with and trust.
Let me know if you need any assistance on the acquisition side as well. I’d love to help with the search and assess the viability of the property as a rental after you and your family have moved out.
Please feel free to give me a call/message/email at any time.
Hi and welcome! I'm so glad you had the change of mind. I'm a Navy spouse and I try to tell all our friends about how easy they can build their RE portfolio using VA, BAH. If you buy a house in every city your stationed at, you will have a nice rental income at retirement. I suggest taking the home buyers class that MWR offers, you will learn good tips about VA loans. And like others mentioned, take the time to get a quote from credit unions. There are plenty of VA loan specialists that can get creative, let me know if you want those contacts. I'm glad that you're educating yourself, but don't get trapped, gotta take action as well. I'll be glad to set up a property search for you, and answer any of your questions.
Best of luck!!
When i was in the military (retired in 1990), my first four rental properties were initially my primary residence. With each PCS, I converted my primary residence to a rental. I used a VA loan to buy my first property, but never got it reinstated because back in the early 80s I was always able to buy conventional with 5% down. A few years ago, I got a great 15-year rate from the Pentagon Federal Credit Union that beat the VA rate quite soundly. Don't overlook your credit union as a lending option.
If you haven't checked out this article, it's a good overview of using the VA Loan over the course of a military career to build up a rental portfolio.
This turned out to be pretty long, so I'll start off with a tl;dr: If you can find a property that you and your family are happy living in, at a price that would also make it a viable rental property down the road, go for it! If you can't (and it'll be hard in your neighborhood), don't buy a property just because you think you're "throwing away" your BAH by renting - by buying a property, especially with a 0% down VA loan, you're just cutting out the landlord as the middleman of putting money into someone else's pocket. Instead of you paying the landlord and the landlord paying the mortgage interest, property taxes, repair and maintenance expenses, etc., you're paying those directly and keeping a small bit for yourself. Plus, you're incurring additional expenses that eat into whatever equity you do build up in your 2-3 years.
Fair warning, the rest of this may seem like a bit of a downer but having just spent 5 years stationed in San Diego and, after a lot of research, deciding to rent while there and invest in other markets, I think it's worth presenting for you to consider. My point isn't to discourage you from investing in real estate (it's awesome! and a vital portion of my financial strategy). My point is to discourage you from investing in a property that doesn't make sense as an investment just because you think you're "throwing away" BAH by paying rent. With that said:
If you're looking to stay in that particular area, it's probably going to be tough to find a property that fits both your needs/wants as a homeowner and the numbers that would make it work as an investment once you move on. 3bd/2ba in that part of town seem to be running well over $500k. Say you were able to find a 3/2 property that fits your family's needs for $519k (the cheapest I could find on Realtor in the 92124 zip) and use a VA loan, your P&I would be ~$2,635/month. Add on insurance ($130 according to Realtor.com) and property taxes ($340/month per this online calculator) and you're at $3,105. Plus, now you're on the hook for repairs and maintenance.
During your 2-3 years there, $1850-$1950 of that monthly payment is interest. Yea, you can deduct that mortgage interest, but as of the tax laws today, that'd really only save you about $2,675/year in taxes at best versus taking the standard deduction for a married couple. (Lots of folks like to point out the tax deduction but ignore the fact that the only useful part of that deduction is the amount that exceeds what you'd otherwise be able to deduct.)
You can (as of this writing) deduct the property taxes as well, but the recently proposed tax reform bills may affect the amount of both mortgage interest and property taxes you can deduct. In this example, it could mean that you'd only be able to deduct the interest on $500k of the $519k mortgage. And it may be that the standard deduction is raised to a figure higher than the mortgage interest you'd pay, anyway. We'll have to see how that all shakes out.
Looking at rent potential, a quick look showed me 3/4bd/2+ba houses in that 92124 zip going for anywhere from $2,450-$3,895/month. Let's make a favorable assumption, split the difference, and round up to a nice number: $3,200/month. We calculated PITI before at $3,105, which leaves you $95/month to cover management (if you don't self-manage), repairs, maintenance, vacancies, turnover costs, etc. Long story short, you're coming out of pocket every month with this one to pay the bills once you turn it into a rental.
After 3 years, you'd have about $27k in equity (assuming no appreciation/depreciation), which shakes out to about $750/month of your BAH going into your pocket for 3 years living there. The interest payments, property taxes, insurance, and every other expense is your BAH going into someone else's pocket, even if it's not your current landlord's pocket. If the current tax laws hold, you'd also have about $11k in total tax benefits over those 3 years from the benefits of deducting mortgage interest and property taxes beyond the standard deduction. As mentioned, those are up in the air but the current proposals could would wipe out part, or all, of those benefits.
Based on a 3bd/2ba house in Tierra Santa specifically, the best case scenario seemingly looks like this: if you could buy the cheapest house on the market ($519k), your PITI would be about the same as your current rent. Any other costs that you are now responsible for as a homeowner take you above what you're currently paying in rent. So, you'd need to determine if those costs are worth the benefit of building up that bit of equity during your time in San Diego and if you'd be willing to subsidize this property as a rental because you didn't have to put any cash down (Darrell in the linked article mentions this, though his scenarios were more like $100/month versus several hundred, if not $1k+ if you can't get that much rent).
Obviously, the numbers change if you can find a property at a better price, a multi-family where you can rent out the other units, or are willing to relocate to a lower price area but because you mentioned wanting to stay in that neighborhood due to family, I stayed in the 92124. You may also get lucky, buy that house at $519k, and see it appreciate up to $600k when it comes time to move in a few years and sell it for a nice little gain. But, it may also stay at $519k or even go down, at which point there goes the little equity you did build up and now you're stuck holding the house. That's why a lot of RE investors don't bank on appreciation, especially if you put 0% down.
I'm admittedly in a different situation than you (I'm single with no kids), but I found that I could rent a place in a neighborhood I wanted to live in way for less than the non-equity building costs of buying a house in a neighborhood I'd be ok living in. I could then save that money to buy rentals in other markets (what the Real Estate Guys talk about: live where you want to live, but invest where the numbers make sense). I was a 10 minute jog from the beach, was commuting opposite of the traffic, and lived within walking distance of almost everywhere I typically went. Plus, my complex had 4 pools, 4 hot tubs, a gym/sauna, and security onsite that kept and held packages. If I wanted to buy a house in the San Diego area that would make sense numbers wise, I'd be living way further from base, out in the suburbs (not cool for a mid 20s single guy), and would be fighting traffic all the time. Plus, I'd be paying for all the repairs that came up. If you're going to be living in this property with your family, you can't ignore the quality of life factors.
Again, I'm not trying to discourage you from investing in real estate; I'm trying to discourage you from investing solely because you think you're "throwing away money" by renting, getting into a bad situation because the house you want to live in wouldn't make a good rental property, and then being turned off from real estate investing because of a bad first experience. Investing in real estate is awesome, but if the numbers don't work, they don't work. Buy a house you want to live in because you want to live there and it fits your budget. Buy a rental property because it's in a good location and the numbers make sense.
@Account Closed , Thank you so much for the thought provoking post. I have read and re-read through your post as well as done some additional research. So far, Navy Federal has pre-approved me for $500K loan at 3.625% with a 2.15% VA funding fee. I agree that pretty much anything above $500k is guaranteed to cause some financial pain (at least in the early stages). Even above $450k is pushing it... I also agree that renting is not the devil considering I live in the safest part of town with a great school and all overhead costs/utilities are included.
I am taking this slow and have viewed only one potential home so far, just to get my feet wet and allow my wife to participate and provide input. I am waiting for Quicken to respond back about a better rate than what NFCU can offer. I will also check with at least one local lender to try to get my monthly payments down more than what Navy Federal can offer.
I can't imagine what I would do without the BP podcasts and you all! You are helping me feel more confident in my decision making and skepticism of the numbers.
In my opinion, buying in CA in this market makes as much sense as buying Bitcoin at $1700. This is the most expensive real estate market in history, plus I would assume that you will PCS from there in the next 18 months. I would continue to learn. Be a shopper of real estate there, but not a buyer. I would only buy there if you can truly find a deal, good luck, so that I could sell it to a bigger fool for more money before the next crash.
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