This post was originally published on August 8, 2018. I updated, lengthened, and added a table of contents to it.
Investing in rental property with VA Loan is a tricky subject. There are many rules that dictate how a VA should be used. Investing with a VA loan, even in multi-family, is possible. I will show you how to do it so you can get rental income.
The VA doesn’t say you can use the VA loan for investing, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.
You can’t just buy a home and make it a rental property without living in it first. There is an occupancy rule I’ll be discussing.
You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.
Another possibility for investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units for a short period of time. When you move on to your next assignment, you’ll be able to turn the entire property into an rental property legally.
Let’s start digging into the details!
The first thing we need to understand is the occupancy rule.
To get a VA loan, you must intend to occupy the property as a personal residence. Most VA lenders (the VA itself doesn’t do the lending) want you to move into the property within 60 days after closing, but exceptions to this rule can be worked out with lenders on a case-by-case basis.
In some instances, a spouse can move into the property for you, but the lender will still want to make sure you can afford to maintain both residences before letting you qualify. In some cases, it may be possible for a dependent child to move in, but this is rare.
Converting VA Loan to a Rental
The length of time you have to occupy the home before it can be a rental property is not set in stone. If you intend to live in the property when you buy it, and then get orders to move shortly after closing on the property, you are more than likely safe.
The main point is, you intended to live in the property, and did not have orders to move to another location when you made the purchase. This is my interpretation of the rules. Make sure to explain your situation to your lender when you are purchasing.
Multi-family with VA Loans
While the VA loan program was not meant to be used for investment properties, it can be used for that purpose as long as you have an understanding of all the rules.
The VA loan allows you to purchase duplexes, tri-plexes, and four-plexes. You still have to intend on living in one of the units, but are allowed to rent the others out.
This is a great way to get started in multi-family real estate and start receiving rental income.
Househacking is when you either rent out rooms in your house or units in your multi-family property to help cover your rent or mortgage. It’s an amazing way to build wealth quickly with real estate.
The main reason for this is, there are economies of scale in having a multi-family. You have one roof, often one building, and simplified management because everyone is on the same property.
A huge advantage of doing this is, it gives you a chance to experience property management. Even if you don’t love the idea of doing it, it’s important to get the basics down. That way, when you move away, you are able to manage the management company, should you choose to use one.
Having the management experience yourself better equips you to know if you management company is doing a good job or not. It makes you a better owner.
Another great advantage is the loan paydown.
What can be terrific about househacking is your mortgage can be largely subsidized by the rents from the other units. You may be living in your unit free or almost free.
There are other expenses to consider on top of the mortgage, but this can be huge!
Also, multi-families tend to cash flow better, or make more money, than single family homes for rental properties.
Qualifying for the Multi-family VA loan
Each lender will approach the qualifications differently, but here is an example from Veterans United, a large lender. They won’t consider potential future rental income as income towards qualifying for a mortgage unless you have at least a two-year track record as a landlord or have been using a property management company. You need the renters in a lease before closing as well.
If you qualify and want to count future rental income, they also want six months of full mortgage payments as cash reserves in the bank. Other lenders will probably require something similar.
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Multi-family Investing Criteria
It’s easy to invest right off the bat when you buy a 2, 3, or 4-unit property with a VA loan because you can rent out the additional units immediately. In fact, the lender will likely require they are rented out before closing. The same rule as single family homes still apply, you need to intend to live in one of the units.
Once you move on to your next assignment, you are legally able to rent out the entire multi-family property as an investment. This is an extremely useful benefit because you are able to buy a multi-family property with no or a small down payment.
Try that without the help of the VA!
Most people can’t afford the down payment on a 4-unit property.
Once you move away, you may need to think about finding a property management company. My key to success with living overseas with 20 properties was a great property manager.
Click to get a free pdf of my tips on finding the best property managers.
Single Family Investing
To invest in single family homes with the VA loan program, you must intend to live in the house as your primary residence when you purchase it, and live in it for a period of time before turning it into a rental. That period of time is not set in stone and not mandated by the VA. It can be flexible depending on the circumstances that cause you to move. Check with your lender.
The point to remember here is, you are buying a house to live in for an unclear period of time, but should be more concerned about how it will perform as a long-term buy-and-hold rental when you purchase it. You need to consider that when you move away in a few years it will become an investment property.
This is a somewhat rare exception to the VA occupancy rule. This rule allows buyers to move forward with a VA loan even if they can’t maintain a physical presence at the home on a daily basis. This often applies to Veterans working overseas as civilian contractors, but every buyer’s situation is different and you can always attempt to discuss this with your lender.
The lender will want to establish that the veteran has a history of continuous residence in the community he wants to buy in. They’ll also be checking to see if it looks like a primary residence has already been established somewhere else.
How to Get a VA Loan
You can read down further for some more information about using a VA loan to buy a house, or click here for my separate detailed post on How to Get a VA Loan
Everybody loves to point out there is no private mortgage insurance (PMI) on a VA loan when you have less than 20% down. This is because the VA guarantees 25% of the loan up to a limit for a lender. This makes it possible to purchase houses with no money down without paying PMI. This guarantee also allows interest rates to be slightly lower than similar non-VA loans.
This is an investors dream!
But nothing is free in this world.
The VA balances this out by charging a funding fee for the loan.
This fee will be a percentage of the entire loan, and can be paid in cash or rolled into the loan price.
The amount of the fee will depend on the type of veteran you are, down payment amount, and whether it is your first or a subsequent time using the VA loan.
|Type of Veteran||Down payment||% for first time use||Subsequent use|
5% or more
10% or more
5% or more
10% or more
Ability to Waive Funding Fee
Certain people are able to waive the funding fee. This is a HUGE benefit. If you fall in this category, the VA loan is a no-brainer for you. It will be an excellent value compared to other options.
You do not have to pay the fee if you are a:
- Veteran receiving VA compensation for a service-connected disability, OR
- Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a Veteran who died in service or from a service-connected disability
If the lender is able to verify from the VA, usually through the certificate of eligibility (COE), that you are exempt, you will not have to pay this fee at closing. If there is any doubt or your disability claim is still pending, you will need to pay. You can file for a refund when your claim is approved and you have all the appropriate documentation.
How to Get a VA Funding Fee Refund
Your Certificate of Eligibility (COE) will state whether or not you’re exempt from paying the fee. There will be cases, however, where there is a pending disability claim when the loan closes.
If your pending claim is later approved with a retroactive date before the close of the loan, you will be eligible for the VA funding fee refund. You may also be eligible for the refund if you have no claim pending at closing, but later have a disability claim approved that is retroactive to a date before loan closing.
This could spans years. It is even possible to request a refund after a loan has been entirely repaid.
Since this fee is paid to the VA, they determine refund eligibility. You can start the process one of two ways:
- Through your original lender
- Through your VA Regional Loan Center
You are usually reimbursed depending on how you paid the fee. If you paid in cash, you will be reimbursed in cash. If you rolled it into the loan, your loan amount will be reduced by that amount.
I have two great links given to me courtesy of Doug Nordman at the-military-guide.com.
The first one is the VA handbook itself. Tons of info if you really want to get into the weeds:
The second link is the specific chapter inside the handbook that explain to VA employees how to process VA funding fee refund requests:
Feel free to comment at the bottom of this post if you have questions about this.
- The lender, not the VA, sets the interest rate, points, and closing costs. You can shop around for better rates. Some may have lower fees or negotiate certain credits
- The cheapest lender may not always be the best. The ability to close quickly and efficiently is important, and can be worth extra money for a more competent company. Try to get references and referrals
- The seller can pay for some closing costs up to 4%
- No commissions, brokerage fees, or “buyer broker” fees may be charged to the Veteran buyer
You need satisfactory credit, sufficient income, and a valid certificate of eligibility from the VA to get the loan.
The VA does not require a borrower to have a specific minimum credit score for VA loans, but many lenders will require applicants to have a credit score of at least 620. If a borrower does not meet this requirement, they may still be approved, but higher interest rates may be charged.
When applying for a VA loan, be prepared to provide copies of W2 statements and previous pay stubs to verify income as well as documentation of assets such as checking accounts, savings accounts, and other financial investments.
VA home loans can be used to:
- Buy a home, a condominium unit in a VA-approved project
- Build a home
- Simultaneously purchase and improve a home
- Improve a home by installing energy-related features or making energy efficient improvements
- Buy a manufactured home and/or lot
- Refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate
- Refinance an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home
There are a bunch of different ways to be eligible for this loan:
- 90 days in a combat zone
- 1 year of active duty
- 6 years of drilling as a reservist or national guard
Here is the link for eligibility rules:
Important Note: Loan limits should be disappearing on Jan 1, 2020 under a new law signed by the President. I will update this document as soon as clear documentation on how this will affect borrowing is available
The VA does not have a cap on how much you can borrow, but they do limit how much of the loan they will guarantee. At this amount or below, you are able to have no or a low down payment. Once you go beyond this loan limit, the remaining portion will require a larger down payment, usually about 25% of the portion over the loan limit.
The typical loan limits for no money down in 2019 are as follows:
$484,350 for one property
$620,200 for a two-plex
$749,650 for a 3-plex
$931,600 for a 4-plex
These are the amounts for most locations in the U.S., but you should look up your location on the VA website. Some locations have limits quite a bit higher, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
You can check these limits here:
How Many VA Loans Can I Have?
People often ask if they can have two VA Loans or more.
You can have more than one VA loan at a time up to the loan limit referenced above. The loan limit applies to the location you are looking to buy in now, not the location you bought before.
In order to understand how to get a second or even third VA Loan, you must first master the complicated concept of the remaining entitlement. I will attempt to make the difficult concept a simple one here.
The VA guarantees a portion of every loan it makes. That is what makes it possible for these loans to have no down payment. The amount of guarantee is reflected in a dollar amount called an entitlement.
You can be clear on what your entitlement is by getting your Certificate of Eligibility (COE).
VA borrowers that have to relocate can turn their current homes into a rental property and purchase another home with a VA loan.
The remaining entitlement they have on their Certificate of Eligibility will determine if it will be necessary to have any down payment on this property.
How Down Payments are Calculated
There are two layers of entitlement for VA loans. A basic entitlement for $36,000, and a second tier entitlement for $85,087. Add these together, you get $121,087.
This is the amount of a loan that can be guaranteed. As the VA typically guarantees 25% of a loan, if you multiply that number by four, you will know how large of a loan you can get with the entitlement.
$121,087 X 4 = $484,348 max loan amount with no down payment for a single family home in most parts of the US.
Keep in mind, you can certainly get a bigger loan than this amount, but you start needing to contribute for a down payment at that point. This only applies to the amount over $484,348.
I’m going to keep the numbers easy.
Let’s say you end up wanting to borrow $585,348 to buy a house.
That would be $100,000 over the max loan amount possible with no down payment.
So how do you calculate how much of a down payment you would need to come up with yourself?
Well, 25% of a loan needs to be guaranteed. Typically, the VA guarantees it with the entitlement. But once you’ve used that all, then you guarantee it with a down payment. So you guarantee the extra $100,000 with a 25% down payment.
You need to put $25,000 down on the entire $585,348. While this is 25% of the $100,000, it is only 4.3% of the entire loan amount. Not too bad.
How to Buy a Second Property (or Third)
Purchasing a second property is sometimes called a second tier entitlement in VA loans circles. Now you’ll sound really cool when you know that!
Once you understand how the downpayment is calculated, you can use the same process to understand how to turn your current VA loan home into a rental, move to a new location, and buy another primary residence with another VA loan.
Again, knowing that your total entitlement is $121,087, which represents 25% of what you can buy ($121,087 X 4 = $484,348)
$484,348 is the maximum amount you can borrow for a single family home in most parts of the U.S. Some high cost of living (HCOL) areas actually have a higher allowance.
If you spent $200,000 on your first home, when you moved to a different city, you would have ($484,348 – $200,000) $284,000 that could be borrowed later without needing a down payment.
For every thousand dollars over that amount you need to borrow, $250 of downpayment would be needed. You need to cover 25% of anything over the maximum with you own downpayment money.
Minimum Loan Amount for a Second Property
Purchasing again using your second tier entitlement comes with a unique rule.
The second loan has a minimum of $144,001.
You can count your funding fee, which can be rolled in to the loan amount. Just keep in mind, you have to borrow at least that amount or more. If you are going to borrow less, it won’t qualify as a VA loan.
I know, that’s weird!
Remember! On your second or subsequent properties, the funding fee is quite a bit higher. It can be reduced drastically by putting 5% down. This might be a good idea!
Calculating Rental Income
Having two VA loans at the same time can be difficult to afford.
When it comes to qualifying for the second VA loan, you can cancel out your mortgage payment on the property you turn into a rental as long as:
- You have a lease for at least 12 months
- You have a security deposit
- You are not leasing the home to a family member (cheating!)
What you cannot do is take a positive cash flow from your rental property and apply that as proof of income towards the purchase of your next property. No matter what your rent amount is, they just consider that as cancelling out your mortgage payment on the loan turning into a rental.
You will have to qualify for the new property with your military or other income.
An entitlement can also be restored by paying off the VA loan and disposing of the property (that usually means selling it). If you pay off the loan and keep the property, you can restore the entitlement one time in your life. This will free up the VA loan entitlement to be used again, subject to occupancy rules.
A VA loan is assumable. This means another party qualified for VA loans can assume your loan. If somebody assumes the loan, your entitlement is restored.
The VA Appraisal
Once you have an accepted offer on the property, it will need to undergo a VA appraisal. This is part of the loan qualifying process where they check the fair market value and, more importantly, see if the home is safe, sound, and sanitary according to VA standards.
Safe – The below chart was created by Veterans First Mortgage to give an idea of some of the things the appraisal will look at to determine the property is safe:
Sound – This applies to the structure and functionality of windows, doors, and appliances. They care about foundations, even on manufactured homes, and will pay attention to water leaks and make sure the source of the damage is addressed.
Sanitary – This leaves a lot subject to interpretation, but the home cannot be a health hazard. Think sewer, septic, water, wells, etc.
VA Appraisals and Investment Properties
In case you haven’t noticed, the appraisal that happens on a VA loan is different than one on a conventional loan. The safe, sound, and sanitary guideline is approached differently by each VA-approved appraiser. This has caused problems for some buyers and sellers. This will affect your investment strategy.
For one, you may consider avoiding properties that need significant work. Fixer-uppers and distressed properties can be tricky. In most cases, identified issues have to be fixed before closing. This is unfortunate, as the sound investment practice of buying distressed property and fixing it up yourself does not work well with VA loans.
Caveat: There is a specific way to purchase a property with a VA loan with the express purpose of improving the property. I hear it’s difficult and requires a significant amount of paperwork and navigation of bureaucracy. Proceed at your own risk!
Additionally, there have been some complaints, both from buyers and sellers, that certain VA appraisers come up with unreasonable findings or low estimates. While sometimes these are successfully challenged, on certain occasions deals are lost. This is upsetting to both the buyer and seller.
A prominent blogger and good friend of mine had this very problem. I’m trying to keep his identity a secret, but he’s a surfer, and his first name is Doug. (I know, too vague)
He challenged unreasonable findings by his VA appraiser, and was unsuccessful in having anything done about it. He was forced to use a different funding source that cost him a lot more money.
To be fair, many people’s VA loans go through without a problem, but the appraisal process is more stringent than what a traditional loan requires.
Also, keep in mind, this appraisal is not for you. It is not to protect your interest in this property. It’s for the lender and the VA.
I recommend you do a separate home inspection at your expense to identify all issues with the property you might not be aware of. I do this on all my properties. This person is paid by you and is looking out for your interests. That matters.
You should tell them what types of things concern you the most. I’m always most concerned about hidden water damage, foundation issues, and add-on rooms that were done poorly.
Should You Invest with a VA Loan?
It’s nice to know you can invest in rental properties with a VA loan. That doesn’t necessarily mean you should.
Let’s look at some of the important factors to consider.
On a VA loan, everyone gets so excited because you can buy a property, maybe even a four-plex, with NO MONEY DOWN!
I know a lot of real estate investors that consider this the greatest thing in the world. They would say you are crazy if you don’t use your VA benefit to it’s max to get as much property as you can with no money down.
But just like alcohol, chocolate, and Game of Thrones, I believe all things should be done in moderation. Consider not being too highly leveraged with no equity.
The risk you run is buying a property with no money down and then having the price of your property and rents drop during the time you own it.
When you move away, you may find that you have trouble renting it out because of a depressed market in your area, and you can’t sell because you have no equity and owe way more than the house is worth.
If you can’t rent it out to cover your mortgage, and you can’t sell, you are forced to dump money into this property every month until you figure out how to fix your problem. The property is no longer an investment, it’s a liability.
Of course, the opposite could happen. Your no money down property could skyrocket in value, and you come out the hero. That would be great, but there are no guarantees. You need to gauge your risk tolerance and decide to what level you want to take advantage of no money down.
If you are going to make a 20% down payment, it may not make sense to use your VA benefit. Using mortgage calculators, compare the interest rates of the VA loan vs. other types of loans. Be sure to factor in the funding fee.
You should be able to figure out which loan will be better for you. It may end up being VA, but not necessarily. Also, you may want to save your VA benefit for an opportunity in the future where you want to buy a house with no money down.
A common investment strategy is buying distressed homes at deep discounts and then doing the work of getting them ready to either rent out or flip. I’ve done this. Based on what we know with the VA appraisers, this strategy won’t work well with VA loans.
It’s Not as Simple as Just Buying Homes
You’ve decided the VA loan is for you.
So you buy a home at every assignment, and turn it into a rental when you move away.
And retire rich.
This is a common mistake that military members and Vets make. They buy houses that won’t make good rentals. They don’t look at the numbers before they buy. It is a fallacy that you should buy a house at every duty station and then rent it out when you leave.
This will not work.
You have to buy the right house in the right locations. Not every duty station will have houses than can be bought for prices that will make them good rentals.
You need to understand real estate investing and run the numbers before you purchase. The rental should be able to make a return on investment (ROI) that is higher than what the stock market or other passive investments would offer.
To understand more about this, read my post on Real Estate Mistakes Military Members Should Avoid
That is my complete summary of using the VA loan for investing.
Here’s a link to a summary of VA Home Loan Benefits
Finally, my post on How to Get a VA Loan
Tell us about your experience investing with a VA loan in comments.
Rich on Money