Investing in real estate requires capital. In most cases, the capital needed usually surpasses the investors’ resources.
As such, it’s common for investors to find ways to leverage other people’s money to purchase investment assets. However, the world of investment property loans may not be everyone’s cup of tea. Some of them come with stringent qualification requirements, high-interest rates, and exorbitant fees.
These conditions are not favorable to everyone. To that end, investors are always looking for financing options with friendly terms to finance their investment property.
This is where VA loans come in. Today, we look at what they are, whether you can use them for investment, and the requirements for qualifying for one.
Related: A Guide to Creative Financing for Real Estate Investors
What Are VA Loans?
VA loans are types of mortgage loans guaranteed by the US Department of Veteran Affairs. They are made available for army veterans, military members, and their surviving spouses to purchase real estate properties.
What makes VA loans the dream financing option for real estate investors?
For one, they require little or zero down payment from investors. Secondly, they don’t have a credit score minimum. In short, they’re a great option for investors who may not have an attractive credit history.
The VA’s only requirement when it comes to the credit score is for the lender to consider the borrower as a worthy credit risk.
The loan terms also make VA loans the dream mortgage. They include:
- Down payment may only be required unless the property’s purchase price is above its value
- You’re not required to get private mortgage insurance
- Limited closing costs which may be facilitated by the seller
- If you decide to pay off the loan early, there’s no prepayment penalty
- The VA provides assistance for members to help them avoid defaulting on the loan
Types of VA Loans
The VA provides various types of loans for its borrowers. They include:
- Home Purchase Loans: As the name suggests, these VA loans are offered for investors who wish to purchase a home. As we’ve seen above, the loan provides favorable interest rates and doesn’t need a down payment.
- Native American Direct Loan: This program is offered to native American veterans to finance the purchase of homes and construct or renovate their property on federal trust land. They also offer reductions in interest rates.
- Cash-Out Refinance Loan: This loan is offered for mortgage holders. It allows the borrower to take out a loan against the home equity to take care of other bills or pay debts. It turns home equity into cash and provides the borrower with a new mortgage that’s larger than the existing one.
- Interest Rate Reduction Refinance Loan: These loans are also known as VA streamline refinance loans. Borrowers can get lower interest rates by refinancing their existing VA loan.
Can You Use VA Loan For Investment Property?
VA loans have established themselves as some of the best investment property loans for veterans as they provide investors with numerous benefits. However, many investors ask whether they can use them for investment homes or multi-unit property.
To answer the question, yes, you may take out a VA loan for investment property.
However, remember that they are designed to help army veterans and military service members to purchase a property they plan to use as their primary residence. As such, investors can’t use the loans to purchase an outright investment property. For example, you can’t use a VA loan to purchase a home you intend to fix and flip or rent out immediately.
This doesn’t mean that you’re entirely barred from earning money from property you financed via a VA loan. If you plan on using a VA-financed home as income property, you may want to see whether you meet these requirements:
Have a Military Service
Military service is the foundation of VA loans. This means that for you to use VA-financed property as an investment, you or your spouse (if you’re co-buying) needs to be currently in the military or a veteran.
There’s also a cap on the number of days you need to have spent in the military, based on the period you served. The requirements are quite particular depending on whether you were involved in peacekeeping or combat missions.
Before applying for a VA loan, always confirm with the VA website to check if you’re eligible. If you qualify for one, you may need to get a Certificate of Eligibility from the Veterans Affairs department.
Use the Property as a Primary Residence
VA loans are helpful when you opt to go the house hacking route. Simply put, house hacking is an investment strategy where you buy a multi-family property, live in one of the units, and rent out the rest.
You can play smart and buy a multi-family property via a VA loan and earn rental income.
Remember that one of the primary requirements of a VA loan is that you have to use the property as your primary residence. This means that you’ll have to live in one of the units if you intend to purchase a multi-family property via a VA loan.
You’re also given a period of 60 days after closing on the loan to move into the property.
You Can’t Have No More Than Four Units
While you can use VA loans to purchase multiple-unit properties, there’s a cap to it. You can’t purchase a property with more than four units. Any property with more than this number simply won’t qualify for financing.
You’ll be safe if you’re purchasing duplexes, triplexes, or quadplexes. Big apartment complexes don’t make the cut.
Is Taking a VA Loan a Good Idea
Earning rental income from your primary residence is one of the huge benefits you can get from taking a VA loan. You can continue earning income from the home for as long as you own the home, and long after you’ve finished paying off the loan.
Even better is the fact that you don’t need any down payment to purchase your home using a VA loan. If you were to buy real estate investment using other types of financing, you may need up to a 25% down payment. This significantly affects the return on investment, which is a key indicator for whether it’s a worthy investment.
Here are a few other important points about VA loans that you should know about before taking one:
- The VA doesn’t issue the loans: Many people believe that these types of loans are issued by the VA itself. However, the VA only acts as a guarantor for every approved mortgage loan. The financing is issued by a third-party lender.
- Reusability: Another great benefit of VA loans is that you can reuse the full entitlement for any number of times you want. The only condition is that you pay off the loan fully each time. You can even qualify again if you lose the loan because of foreclosure.
- No loan limits: VA loans don’t have loan limits. Army veterans and service members can borrow as much as they’d want. There are no borrowing limitations as long as the lender approves.
Tips For Using VA Loan For Investment Property
Like any other investment option, you need to carry out your due diligence when investing in real estate using VA loans. Remember that there’s some risk involved which you should know about and prepare for beforehand.
While there are many factors to consider, here are the basics:
- Pay attention to the location: If you want to use the home as an investment property and earn rental income, you need to identify areas that are suitable for this investment. It’s impossible to set high rental income rates in a low-income market. Also, remember that your rental income will contribute to your loan repayment. The higher the rental rates, the more your tenants contribute to mortgage repayment. You’ll also have more money left after making your monthly payments.
- Do the math: You should establish how much principle, taxes, interest, and insurance you’ll be paying each month from your rental income. Remember to include other miscellaneous costs for things such as maintenance and repair. Maintenance and repair expenses may vary depending on the age and condition of the property.
- Other considerations: You need to be mentally prepared for the tasks and responsibilities that come with property management now that you’re a landlord. This is not a part-time job and is definitely not a walk in the park. Establish how you’re going to screen your tenants, handle issues and understand some basic state property laws.
Bottom Line
Using a VA loan for property investment is a great idea that could set you up for a positive cash flow. While it offers a lot of great benefits, don’t just get to it blindly. You need to know what requirements are needed for you to qualify. Also, establish why you need to purchase the property then see if the requirements align with your goal.
Use the Mashvisor Investment Mortgage Calculator to see how much you’ll have to dedicate to your mortgage repayment each month. The tool incorporates statistics and analytics to calculate the amount based on how mortgage rates are set to change in the future. To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.