VA loan buy and hold. Does this scenario make sense?

7 Replies

Good morning BP!

I am looking to use my VA loan to house hack until I PCS. I will be moving to a more expensive market and my VA loan won't be of much use to me there.

My long term goal is to establish enough passive income in retirement (supplementing my military retirement) to give me flexibility at that point in my life. 

The deal I’m looking at is a quadplex in a highly desirable area.  The appreciation outlook is good, but the cash flow at the outset is not. 

My thinking is that if I keep a fund aside for maintenance, CAPEX, and vacancy, I can use all of the cash flow to pay down the principle over time - lessening the overall amount I'll end up paying for the place and also allowing me to use all of the rental income to supplement my retirement income in the future.

Here are the numbers:

List price: 575k

Rental income: 3525 (easily increased to 4K quickly after purchase) - with all 4 units rented out.

CAPEX, mntc, vacancy 5% - 200/200/200

Management 8% - $320

Insurance - $110

P&I (3.5% interest) - 2582

Operating expense (including CAPEX, mntc, vacancy) - 3,612

Without CAPEX, mntc, vacancy (~10k fund set aside and replenished as needed) - 3,012

This leaves me roughly 1k per month to apply towards the principle. Thus, decreasing the time it will take to own the home outright to supplement retirement income.

I plan on using conventional lending on other properties for cash flow, but I would also like to take advantage of the VA while I can.

Any advice on the above would be greatly appreciated!

Thank you!

@Brian Raike Welcome to BP and congrats on looking into REI. I shook my head immediately when I read "the appreciation outlook is good, but the cashflow is not". Come on man you know better than that. You should not even focus on appreciation as a possibility, that is foolish and is what screwed over so many people in 2008. Cash flow is what is important, unless you already have a good reliable cashflow income and can support that debt and then some I don't think it is wise to do the deal. I'm sorry but I am a firm believer in the 1% rule and this doesn't meet that criteria. I'm assuming this is in the DC area but I could be wrong. I know that the prices there are absurd, but I don't think that is an excuse for doing a deal that doesn't cashflow. As a first deal this could make or break you. I always evaluate my deals using Grant Cardone's worst case scenario, so if anything went south, or the market crashes it will still support itself and even cashflow. I would recommend being patient and waiting for a better deal. I don't know your market, but hey maybe this is a good deal. I just hope that you have done enough research and evaluated enough deals to be able to tell the difference. From the info you gave me I would just be patient and wait for a better deal. It's much better to wait for the right deal than to take down the wrong one because you are eager to get a deal done. Good luck and trust your gut and do what you think is right!

I'll have to agree with Michael Guzik.  I would be careful to make sure that you have a firm grasp from rents.

May I ask, what makes you so sure it will rent for $4k easily? It can be harder than expected depending on the neighborhood.  One thing I always check in DC is whether or not the area's market rents exceed the housing voucher rents that are more reliable, depending on the neighborhood.  Google "HCVP rents DC" and you'll easily find it.

I would find a place that's definitely going to cash flow for you, even if just a little upfront.

Also, beyond just setting aside reserves, which you should definitely do, take a look at what's going to need replacement within the next 3-5 years.  You need to consider those cash out flows too in the event you do not have extra income or savings to cover those expenditure as they arise.

If you are using a zero down loan on a property in the DC area...then simply you should not expect to cash flow, and that does not mean you should not buy it.  When an investor is buying a property and looking to make a return on it, they are typically putting down 20% and expecting to cash flow based on that larger down payment. If you want to buy in a high demand area like DC, and will put 0% down, you will not cash flow.

If the property is on the west side of the Anacostia River, then Id say in most instances, if it is even close to an appropriate price, then you should buy it.  Multis are extremely rare in the area, and due to that they are in high demand. You also have multiple exit strategies with multis here, as typically the highest and best use of them is to carve them up into condos to unlock maximum value.  Condo conversion though is less of an option EOTR, east of the river.

If the property is EOTR, then really the decision lends yourself more to your risk tolerance and goals.  I like Deanwood and over by Benning Rd a bit. I am less a fan of Anacostia and down that direction.  However other people love that area down there, and it has had huge gaines the last 2 years. 

Originally posted by @Russell Brazil :

If you are using a zero down loan on a property in the DC area...then simply you should not expect to cash flow, and that does not mean you should not buy it.  When an investor is buying a property and looking to make a return on it, they are typically putting down 20% and expecting to cash flow based on that larger down payment. If you want to buy in a high demand area like DC, and will put 0% down, you will not cash flow.

If the property is on the west side of the Anacostia River, then Id say in most instances, if it is even close to an appropriate price, then you should buy it.  Multis are extremely rare in the area, and due to that they are in high demand. You also have multiple exit strategies with multis here, as typically the highest and best use of them is to carve them up into condos to unlock maximum value.  Condo conversion though is less of an option EOTR, east of the river.

If the property is EOTR, then really the decision lends yourself more to your risk tolerance and goals.  I like Deanwood and over by Benning Rd a bit. I am less a fan of Anacostia and down that direction.  However other people love that area down there, and it has had huge gaines the last 2 years. 

Normally, I would agree with you. Usually putting zero down means you won't cash flow. However, I put 0% down on my property and the cash flow is unreal. Every now and then you can steal a property in a gold mine rental market from someone who needs to sell quick or downright makes a mistake (mistake in my scenario). I wish veterans would understand the value of what I call the "invisible cash flow". For example, when I occupied my multi unit property, the city could not raise my taxes beyond a certain point. I received a TON of tax credits for occupying it, and my mortgage was paid in full by the second unit. My rent prior to that was $2000 a month (living with my girlfriend) so really, thats what I feel I was saving? In my eyes, that property has a great cash flow with me renting both units but a better cash flow with me OCCUPYING it. I understand that we should always be thinking long term here but I think people forget what they can achieve with the cash flow created from "house hacking" with a VA loan. Just my opinion though.

@Michael Guzik and @Nabeel Elnahal - Thanks for the response. I'm definitely not relying on appreciation. Perhaps I should have left that out. At current rents, the place makes ~$500 over breaking even (used in the CAPEX, vacancy, and Maintenance #s). The home is in downtown Fredericksburg, VA, not D.C. The rental inventory is low and the demand is high. Comps are all above 1,050 and the average is ~1,115 (comps, Zilpy, and Rentometer). There's certainly risk though and your posts are appreciated. I've got some things to consider.

@Matt K. - That's right. The scenario I posted is for after I move out (less than a year). I'll house hack in the meantime.

@Russell Brazil - The place is in Fredericksburg, but I took the approach you described. It's tough to get great cash flow with no money down. However, I'll have tenants paying into my retirement plan for the next decade plus. There's certainly still risk involved, so I've got some thinking to do.

Thank you all for you insightful responses. Much appreciated!

@Brian Raike B-Man, First off, the area is solid as you said. Appreciation aside (I was here in MD during the last crash/correction and prices barely flinched in the rental market). You are clearing $500/month with very little cash outlay. This is nothing to flinch at. A SFH clearing $500 after expenses is solid and you will have the redundancy of a 4-plex which is far better than dealing with a SFH in my opinion. There are some things to consider but the more I rack my brain the more I think this one is a solid play...I also know you have the means (and steady income) to cover any incidentals that may arise. I spent over an hour looking at the "Southwest Airlines" planning map at work today so let me sleep on it and we can chat Sunday, lol. The other replies are solid but you know your personal situation better than anyone so take in their comments and draw up a good COA comparison to drive your decision ;)

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