Generally, you cannot use a VA home loan to buy investment real estate. But that’s not quite the whole story.
The VA says investment real estate is “a property that the borrower does not occupy as a primary residence or second home, regardless of whether the property generates income for the borrower.”
OK, that’s pretty clear. No VA loans for a place that’s not your main residence.
However, if you look at the official definitions there’s also a touch of space for an investment property: The VA says “residential property may not consist of more than four family units and one business unit except in the case of certain joint loans.”
This means individual qualified borrowers can get VA financing with nothing down to buy a home with one-to-four-units and even a business. The key requirement is that one unit must be your prime residence, the place where you live or intend to live. The other units can be rented.
Does it make sense to use a VA mortgage to buy duplex, triplex or even a fourplex?
There’s no universal answer but consider these ideas:
- If you buy a property with two to four units and live in one, then up to 75 percent of the rental income from the other one to three units can be used to help prequalify for a mortgage.
- With VA financing you can buy property with zero down.
- If you occupy one unit and rent the rest, it means part of the property can be depreciated. That’s a big tax advantage.
- While home prices have generally declined since 2007, apartment rates since 2009 have generally risen, according to REIS Inc.
- A growing population means there’s generally more need for housing.
The Federal Reserve estimates that lenders will add as many as 1 million additional units to their foreclosure inventories in 2012 and 2013. Most of these homes, at least temporarily, will not be available for housing. More foreclosures mean more people looking for rental units.
Renting may seem enticing, but a little balance is in order. For instance, renting is not a sure thing. There can be vacancies, damages and repair costs. Rental rates can fall. You need cash in the bank or solid credit to cover costs as they arise. And some communities have rental control regulations that may limit your ability to raise rents and impose other requirements.
If you have a property with two to four units, you’ll live in one and rent out the rest. The tenants then know where to go with problems. This can raise issues of privacy if you don’t like getting a knock on your door at 3 a.m. when the dishwasher floods the kitchen.
And if you don’t like confrontation then being a landlord may not be for you – you have to collect the rent, and, with deadbeat renters, that can be difficult.
Many communities – but not all – have a good mix of housing units, employment and population growth that you want to create a healthy rental market. It’s important to ask area real estate brokers about local trends and developments such as the construction of new roads or the expansion of local businesses.
Loan officers with Veterans United can tell you more about VA financing and the VA loan requirements for properties with two, three and four units.