Can a VA Loan Be Used for an Investment Property?

Can an eligible veteran use a VA loan to buy an investment property? Like most good questions, the answer to that is a highly irritating "It depends." But luckily the rules are fairly straightforward, so it shouldn't take long to explain them.

Before getting into the details, let's get one thing straight: If you're planning to build a Trump-esque real estate empire on the back of multiple VA loans, it's time to adopt a new strategy. Those mortgages are intended to help veterans buy their own homes. However, there is a little wiggle room ...

Buy to Rent Out

Although the rules say the home you want to buy or build must be your primary residence, they also allow that property to have up to four separate living units, usually divided up into apartments or similar. So you could live in one of those, and rent out the other three. Indeed, you might be able to add a fifth unit that can be used only for business purposes and use or rent out that, too. Before you get too excited, be aware there are some extra regulations concerning who can qualify for these multi-unit properties, and you can read about those below.

If you're eligible yourself, and you want to team up with other veterans or service members to apply for one of these mortgages, you won't each get four residential units. If you're buying with one other eligible veteran (maybe your spouse), you are allowed to buy or build a property with six residential units, but after that it's one more unit for each additional veteran, so seven units for three veterans, eight for four, and so on.

One other potential loophole is explored on the website of federal regulator, the Consumer Financial Protection Bureau (CFPB). Again, it's probably most likely to apply to two people, both of whom are eligible for VA loans. Suppose you've both been living in a home you bought together with one of these mortgages. You may be able to use any remaining, unused eligibility you have between you to buy another home, providing you move into that one as your primary residence. You might then be able to rent out your existing home. The reason for all those "may" and "might" weasel words is that any such move is surrounded by complicated rules, and that's why the CFPB urges those contemplating this sort of plan to consult their regional VA office before taking it too far.

Rules for Buyers of Multi-Unit Properties

Here are the two most important extra regulations, mentioned above, that might affect your ability to use a VA mortgage to buy a multi-unit property. They apply only if you're going to need some or all of the rental income to keep up mortgage payments:

  1. You have to show you have the background or skills to be a successful landlord. Of course, direct experience would be ideal, but showing you recognize that being a landlord is a part-time job, and that you comprehend and are capable of performing its roles may be enough. Those roles would usually include finding and screening tenants, providing maintenance personally or by paying professionals, understanding your local rental market and having a realistic grasp of the financial dynamics and disciplines of the business.
  2. You need to have (and here's the killer) sufficient cash reserves to meet six months' mortgage payments without recourse to rental income. Of course, that may not be an issue if you have a good job and can show you could make the payments without any rent, or need only a small cash reserve to do so.

Is This for You?

You don't have to trawl through Google for long to find examples of veterans who've met with real financial success through buying a muti-unit property through the VA's program. Some make it sound much easier than it usually is.

In reality, you need to be a reasonably smart businessperson to pull this off. Before you do anything else, you need to thoroughly research your local real estate market (both purchase and rental) and create a realistic cash flow forecast within a business plan. Use mortgage calculators to help model your outgoings, but don't forget other costs, such as water/sewer and routine and exceptional maintenance. When you're looking at the revenue side, remember that you're likely to have months when one or more of your units is either occupied by a deadbeat tenant who's behind on rent or is empty between tenants. Expect, too, to put in more hours running your business than you're probably currently imagining.

Of course, some people do none of those things, and still make a good income through sheer blind luck. But if your military training taught you anything, it's probably that leaving important things to chance is rarely a winning tactic.

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