Is leveraging 100% with the VA loan a bad idea?

Question

Hello everyone! I am currently in the process of weighing out my options when it comes to using my VA loan for the first time. I am very aware of the risk that comes with leveraging 100% and it is of course, very enticing to do so. I'm in the process of due diligence and I'd like to know some of your opinions on mitigating risk when it comes to 100% leverage and if it should even be an option. The plan is to house hack a duplex in order to lower my monthly expense and save in order to grow my portfolio. I don't plan on purchasing a property that I can't comfortably cover the expense on while it's vacant either. What are some of your thoughts?

James Hamling · Answer

You nailed most of the important parts @Kevin Granado for being viable in correctly using this strategy.

First is understanding what it is, high leverage utilization, the risks.

Second is understanding how to make it make sense. A value-add where you can build an equity spread in the property. A 2 unit property so can produce a revenue to offset operational costs during residency.

And third, with a "doomsday" mindset of "if everything goes wrong, what do I do" is a strong indicator of mature consideration.

Your coming at this correctly Kevin. And I can tell you I've had some start the exact same way who now, today, after disciplined years of rinse & repeat, are with a performing portfolio exceeding their wildest expectations.

It takes disciplined consistency, understanding this is a building strategy, amassing performing assets for a future harvesting cycle NOT something to replace active income in a short-term lens like 12-36 months.

I encourage value-add plays, strongly.

Ken M. · Answer

Your Comment: "I am very aware of the risk that comes with leveraging 100%"Maybe you are, maybe not. NAR (National Association of Realtors) says it takes about 8% to sell a house. If you buy a $400,000 house, and in a year you are forced to sell, you will spend about $32,000 prepping the house, real estate fees, closing costs and other essentials. You will have paid down $4,969, so you will still owe $395,031. That means you will bring to closing $27,031 cash when you try to sell. So, if you have more than that in savings, you might be able to close. Property investing is an expensive, sometimes risky, long term game.Would you really want to use up all of your savings (assuming you have some)  to get rid of a house? You don't tell us where you are, but right now, on the MLS a third of houses don't sell and actually go off market with no success. There is no wave of appreciation in most markets. Certainly not enough to cover selling costs.

A bank doesn't have to allow a short sale, they can force a foreclosure.

Ken M. · Answer

Your question was: "I'd like to know some of your opinions on mitigating risk when it comes to 100% leverage"Can you guarantee the market isn't changing? Can you guarantee you won't get laid off? Can you guarantee that no adverse market conditions will arise? Personally I never like 100% leverage or being overleveraged like some people talk. I buy at about 85% of value using creative finance. That leaves me room to pivot as things change. Any real estate agent will try to get you to buy anyway, since they get a commission if you do. I think that is doing a dis-service to a buyer. I am not a real estate agent, so I view it from safety and profitability from the investor's point of view.You can see how this is done by checking basic techniques I've written about at https://www.biggerpockets.com/posts/user/kenm286/started.Those aren't the only ways and others have other avenues, I just like investing safely.I can be reached by going to https://www.biggerpockets.com/users/kenm286 and clicking on Message

Russell Brazil · Answer

Bad idea? Not per se. But understanding how leverage increases risk is a very important factor that is almost never considered. Kudos to you for taking this into account

Chris Seveney · Answer

The way to mitigate risk on 100% financing is to have cash in hand. If the market declines just realize you are stuck in that property. Cash is king

Stuart Udis · Answer

@Kevin Granado VA Loans when used responsibly can be a great tool. You are already ahead of the curve acknowledging the risk associated with high leverage. This should bode well for you as you are going to be more conservative with your underwriting and selective with your acquisition. Its important to identify property where meaningful appreciation can occur fairly quickly otherwise you are essentially under water due to the transactional costs. If you can ride the wave of appreciation while using the VA leverage, its truthfully one of the best ROI's an investor can capture.

You can spot a neighborhood t that’s about to take off by watching for a few early signs. Look for places where more people or jobs are moving in, new businesses or developments are popping up, and homes start selling faster with fewer listings on the market. If the area is still affordable compared to nearby cities, has good schools coming up, better infrastructure, or a surge of building permits getting filed, that’s a good hint. When several of these things start happening at once—before prices really jump—it’s usually a sign that the market is about to appreciate.

Kevin Granado · Answer

@Ken M. I'll be reaching out. Thank you!

Kevin Granado · Answer

@James Hamling Thank you! What you mentioned is actually exactly what I'm planning. A 2 unit that I can completely cover while vacant and benefit from the lowered monthly expense during residency. I've been window shopping to try and calibrate my eyes to spot properties that have room for upgrades in order to try and meet 10% forced appreciation in the first year. From there, I will hold and ride the waves as I build my portfolio. As I told Ken, my foresight goes beyond a quick buck and I don't expect to see anything within the first few yrs. I'm 27 now and I'd be happy to have a portfolio that allows me to make this my full time career by 40. Thank you for your response! I look forward to continuing to learn as it's only been a few months since I started.

Kevin Granado · Answer

@Ken M. Wouldn't this worst case scenario be a concern if I'm unable to cover the mortgage and other expenses on my own? I have a lot to learn so forgive my ignorance. I understand that there are less common factors that may lead to foreclosure; but realistically, if I'm good to cover my bills shouldn't I be less concerned? My foresight goes beyond a quick buck so I'm more so looking to buy and hold at the moment.

Is leveraging 100% with the VA loan a bad idea?

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