Secrets to Investing with VA Loans

Investing in rental property with VA Loan is a tricky subject.  There are many rules that dictate how a VA loan should be used.

Bottom Line Up Front (BLUF):  VA loans are not authorized for investment properties, but there is no rule stopping you from moving out after initially living in the property and making it an investment.

There is also a way to buy a 2, 3 or 4-plex property, live in one unit, and legally rent the rest out.

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, turn it into a rental property when you move away, and buy a house at your next location with a VA loan repeating the entire process.

Another possibility for real estate investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units while renting the other units out.  When you move on to your next assignment, you’ll be able to turn the entire property into a rental property legally.

Let’s start digging into the details!

The first thing we need to understand is the occupancy rule.

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.

How much Money can you Borrow?

The way VA loan entitlement amounts are tracked is a little confusing.

Bear with me.

Everybody who qualifies for a VA loan starts off with a full entitlement.

You can be sure you have a full entitlement by viewing your certificate of eligibility, or COE.  It’s a document created by the VA showing your entitlement.

How to get your Certificate of Eligibility (COE) 

If your COE says “This Veteran’s basic entitlement is $36,000“, then you have a full entitlement.

Why is $36,000 a full entitlement?

This is because the VA previously used $144,000 as a baseline for tracking entitlements.  25% of $144,000 is $36,000, which is a full entitlement.

This simply means the VA will guarantee 25% on a loan of $144,000.  This allows VA loan lenders (remember, the VA does not make loans) to offer you no money down.

Under new rules which went into effect January 1, 2020, borrowers with this full entitlement ($36,000) don’t have a limit on how much they can borrow with no down payment.

The previous limit of $144,000 no longer applies if you have a full entitlement.

The caveat is, you have to qualify for the loan under your lenders credit and income rules.

The VA does not limit the loan amount that can be guaranteed (and therefore no-money down), but your lender will still want you to prove you can afford the loan.

There are two ways to have a full entitlement. 

You:

• Haven’t used your VA loan entitlement yet
• You used it, repaid it, and now have the original VA loan entitlement amount reinstated.

Getting Additional VA Loans

You may be able to get a second or third VA loan, even if you still have VA loans that you owe money on.

You just need a reason to move.  It can be PCS for your job, retirement, upsizing, or downsizing.  Talk to a VA lender to confirm your reason is ok.  The property that you move out of can become a rental property.

Your new VA loan will be guaranteed (no money down) up to the conforming loan limit in the location you want to buy minus the loan amount you currently have.

Check your county loan limit

The standard 2022 VA Loan limit for a single family property is $647,200.  More expensive cities often have higher limits.  The limits are even more for multi-family.  Check your county loan limit, as it may be higher than the standard.

This means if you default on your loan, the VA will pay your lender up to 25% of the county loan limit minus the current VA loan amount you already have.

This means it is possible that you could have no money down, but if you don’t have enough entitlement remaining, you may be required to contribute a certain amount towards the downpayment.

Calculate Remaining VA Loan Entitlement

Let’s use my situation to calculate how much more money I can borrow no money down from the VA.  I’m going to adjust my numbers a little to make the math easier to follow.

I own one property with a VA loan.  It is my current primary residence.  The loan amount is seen on my certificate of eligibility (COE) and is $400,000. 

I want to buy another property in Montgomery, Alabama.  The loan limit in this city in 2022 is $650,000.  

Lets subtract:

$650,000 – New loan limit minus $400,000 – Prior loan amount

equals $250,000 remaining borrowing power.

This is the amount I can borrow without needing a downpayment.

What if I wanted to buy a house that cost more than that?

For VA loans, the lender wants a 25% downpayment for the amount of the loan exceeding the loan limit.

So…

We’ve determined that I have $250,000 remaining in borrowing power by subtracting my prior loan amount from the loan limit.

$650,000 – $400,000 = $250,000

For every dollar over $250,000, I need to contribute 25 cents (25%) as a downpayment.

If I want a loan for $350,000, but I only have $250,000 left in no-money-down borrowing power, then I’m $100,000 over the loan limit.

I don’t need to come up with the entire $100k.  I need to come up with 25% of that.

$100,000 X .25 = $25,000

So on a $350,000 loan, my downpayment is only $25,000, because the VA is still guaranteeing $250k (my remaining entitlement), and I’m only making a downpayment on the remaining $100k.

I have no idea if I did a good job explaining that.

Call your lender with you certificate of eligibility in hand, and they can walk you through the calculation.

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.

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 or 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 is, you are buying a house to live in for an unclear period of time.  If you are going to move away, and that’s pretty damn likely if you’re in the military,  you 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 video can help with that…

There isn’t a set minimum credit score, but most lenders want about 620 to get a loan.  It is possible to have a lower credit score, possibly as low as 500, and have a higher rate.

Also, while the loan often has no downpayment requirement, it is widely misunderstood as meaning you don’t need any money at closing.

While it is possible to have sellers pay for some closing costs, this is not common practice right now (beginning of 2022).

You will be responsible for certain closing costs, and should count on having roughly 2% of the purchase price available for this.

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.

In certain unique situations, military borrowers, such as a husband and wife or two or more friends, could combine their entitlements and purchase more than 4 units.  This also makes it possible to have a business or commercial as part of the deal.

Buying multi-family is a great way to get started in investment real estate, save money on your mortgage, and start receiving rental income.

When you need to move for a change in military assignment, you are able to rent out the entire building as investment real estate and buy another home at your new location with a VA loan as long as you have remaining entitlement.

Househacking

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.

This is possible with the VA loan when you buy a multi-family unit.

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.

Whether you manage the property yourself, or are using a property manager, you will get the chance to understand property management up-close.

It is an important skill to learn.  When you eventually move away, you will be better equipped to deal with the challenges of long distance property property management.

Having 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 of househacking is loan paydown.

Your mortgage can be largely reduced by the rents from the other units.  You may be living in your unit mortgage-free.

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

As I mentioned earlier, the VA does not make loans.

They just guarantee a portion of the loan so lenders can allow no money or low money down.

Lenders are private companies that aren’t tied to the VA or the government, but just using the VA guarantee.

Each lender will approach qualifications for multi-family real estate differently.

One difference is, they’ll be stricter on credit score requirements than they were with a single family home purchase.

You will need likely a minimum credit score of 680 to qualify.

Some lenders will not 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 are going to use a property management company. You need the renters in a lease before closing as well.

Typically, 75% of rental payments can  be used as income to qualify for the loan.

If you qualify and want to count future rental income, they also want proof of six months of full mortgage payments as cash reserves.

Sometimes, a TSP or 401k can be used for this requirement.

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Multi-Family Investing Criteria

You are required to live in a unit of your multi-family property.

However, you are allowed to rent out the additional units immediately.    In fact, the lender will likely require they are rented out before closing.

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.

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

Fees

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 at closing 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.

Click here for funding fee info from the va.gov website.

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!

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:

1. Through your original lender
2. 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.

Other Fees

• 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

Eligibility

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

from benefits.va.gov

Here is the link for eligibility rules:

The VA Appraisal

Once you have an accepted offer on a 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.  Problems with rogue appraisers are not limited to VA loans.  It can happen on any type of loan that requires it.

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 incorrectly.

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 or even a multi-family 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 to invest with VA loans.

Great.

So you buy a home at every assignment, and turn it into a rental when you move away.

And retire rich.

Right?

Nope.

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 which 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 my post on How to Get a VA Loan

Good Luck.

Tell us about your experience investing with a VA loan in comments.

Any questions?

Comment below.

Rich on Money