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Buy rental properties with a VA loan?
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Buy rental properties with a VA loan? | Mintybear/Shutterstock.com

Buy rental properties with a VA loan?

Members of the armed forces don't shrink from a challenge. Which may explain why more of them own rental properties.

Nine percent of U.S. homeowners have investment homes, according to a National Association of Realtors study. But that jumps to 16 percent among owners on active duty in the military.

A lower-cost VA home loan -- backed by the U.S. Department of Veterans Affairs -- might help a service member or veteran who's considering joining the ranks of rental property owners. Here are nine things to know about VA mortgages and investment homes.

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The restrictions can be major | Susan Law Cain/Shutterstock.com

The restrictions can be major

The ability to use a VA loan to purchase rental properties is not unlimited.

In fact, a would-be borrower needs to understand that it can be done only in these situations:

  • If the home is a duplex, triplex or fourplex, and the service member plans to live onsite.
  • If it's a single-family home with an apartment that can be rented.
  • If it's a home that the enlisted person lives in for a time, then elects to rent out after a move or (more likely) a transfer.

You need to compare loans, lenders, agents | racorn/Shutterstock.com

You need to compare loans, lenders, agents

As with any mortgage, VA loan rates, fees and terms can vary widely from one lender to another.

That's something Grant Moon, a veteran and reservist, wishes someone had told him when he used VA mortgages to acquire his two rental homes.

A vet or service member who doesn't shop around "could end up paying tens of thousands more over the life of the loan," says Moon, the founder and CEO of VA Loan Captain.

His advice is to get loan estimates from at least three to five lenders. And, shop around for an agent who understands the program, is a good communicator and can strongly advocate on your behalf.


Condition is key | Ben Parker/Shutterstock.com

Condition is key

As with any mortgage, VA loan rates, fees and terms can vary widely from one lender to another.

That's something Grant Moon, a veteran and reservist, wishes someone had told him when he used VA mortgages to acquire his two rental homes.

A vet or service member who doesn't shop around "could end up paying tens of thousands more over the life of the loan," says Moon, the founder and CEO of VA Loan Captain.

His advice is to get loan estimates from at least three to five lenders. And, shop around for an agent who understands the program, is a good communicator and can strongly advocate on your behalf.


Tenants may be uncomfortably close | Iakov Filimonov/Shutterstock.com

Tenants may be uncomfortably close

Buying rental property with a VA loan often means you'll be an onsite landlord. Can you handle that?

"If you have your tenants living right next door to you," says Danis, "they have nonstop access to you every time they have a complaint."

But the closeness also can be a good thing. "If you're onsite every day, you're not going to have any surprises," he says.


You may want to think rental when you buy | NadyaEugene/Shutterstock.com

You may want to think rental when you buy

If you're in the military or are a veteran and aren't necessarily in the market for rental property, maybe you should be. A VA mortgage loan offers the possibility of renting out your home when you move or are transferred, so you may want to think of the rental potential of any home you buy.

Scout out smaller, single-family homes in neighborhoods with desirable school districts, says Elizabeth Colegrove, a military spouse who runs the website The Reluctant Landlord. She says those houses are easier to rent.

"If you're in the right neighborhood, people will take a 1980s bathroom," Colegrove says.

Research the local rental market, too. Are rents going up or down? Are people eagerly moving into or fleeing the area?


You can't count tenant rent toward income | Wayne Barrett & Anne MacKay/Shutterstock.com

You can't count tenant rent toward income

To get a VA loan for a multi-family building or a home with an apartment attached, the numbers have to work without factoring in tenant rent.

Applicants "have to qualify on standing income alone," says Kevin Parker, assistant vice president of field mortgage operations for Navy Federal Credit Union.  

The lender wants to be sure that you'll be able to make those payments every month with or without renters.


Stuff will happen | ND700/Shuttestock.com

Stuff will happen

With rental properties, things can go wrong. Sometimes in clusters.

"My horror stories came within the first year," recalls Moon, of VA Loan Captain. One tenant moved in, paid rent for a couple of months, then just stopped. That same year, roofing repairs cost Moon $10,000.

"If you've never been a landlord, it will be quite the experience," he says.

Prepare for problems by banking money -- as much as you can. If a tenant moves out, the home needs repairs, or you get transferred and want to hire a management company, you're covered.

One of the attractive features of a VA loan is that you're not required to make a down payment. So, if you're planning on being a landlord, "keep that money in your reserves," Moon advises.


You'll need to vet management companies | Dragon Images/Shutterstock.com

You'll need to vet management companies

For any active-duty service member, the question isn't so much if a transfer will come as when. You need to have a plan in place for your rental property.

"If you're active duty and you get transferred out of state, you'll need a rental company to manage it for you." says Danis, of Residential Mortgage. From a distance, "it's almost impossible to manage it yourself."

Moon recommends vetting at least three different management companies – preferably long before you ever need them.

"The standard [fee] is 7-10 percent of the monthly rent roll," he says. "Yes, you're giving up a chunk. (But) it's the difference between eating well and sleeping well."


Consider the loss of VA loan 'entitlement' | dotshock/Shutterstock.com

Consider the loss of VA loan 'entitlement'

When using a VA loan for investment property, you need to ask yourself: Is it worth giving up part of your mortgage entitlement?

How it works: If you're eligible for a VA mortgage, you're assigned a set amount -- called an "entitlement" -- which can be as high as $106,025 in most parts of the country. Each time you buy a home, the VA insures 25 percent of the purchase, and that amount is subtracted from your entitlement.

Once the entitlement is used up -- on one property or over several -- you'll have to rely on non-VA financing for any subsequent mortgage or refinancing.

Or, you can regain a portion of your entitlement by selling a property and repaying its VA loan.

Want to learn more about how to qualify for a VA mortgage? Here are five things you should know.

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Brought to you by Veterans United Home Loans Veteran Homebuyer Central Veterans and military members have access to one of the most powerful homebuying tools on the market – the VA loan.
These articles were created solely by Veterans United, a paying advertiser from whom Bankrate receives compensation. The editorial staff of Bankrate was not involved in the stories' preparation.
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