The VA loan program, a mortgage option guaranteed by the U.S. Department of Veterans Affairs, is one of the most beneficial mortgage products available to qualified service members, veterans, and their families. Yes, VA loans are primarily intended for owner-occupied homes, but many borrowers are curious if there’s a possibility to use a VA loan for investment property. VA loans also have specific occupancy requirements, but there are ways to utilize them for investment purposes without running afoul of the rules. In this guide, we’ll show you how VA loans work, how to use them to invest in real estate and make money to build wealth.
Understanding VA Loan Basics
VA loans are intended to support veterans and active-duty military members in buying homes on competitive terms that include:
- No down payment required
- Requires no private mortgage insurance (PMI)
- Competitive interest rates
- Flexible credit requirements
- Limited closing costs
These advantages make VA loans a cheaper option for buying a home, but they come with one big caveat: The borrower has to plan to live in the property as their primary residence.
Can You Use a VA loan for investment property?
The VA loan program cannot be used to directly finance investment properties made solely for rental income or commercial use. But there are ways to use a VA loan strategically to invest in real estate that do a good job of complying to the guidance from the VA.
1. Multi-Unit Properties (House Hacking)
VA loans enable borrowers to purchase multi-unit properties (up to four units) as long as one of the units is used as a residence. This strategy, commonly referred to as “house hacking,” allows buyers to rent out the other unit(s) and earn passive income while still experiencing the benefits of a VA loan.
2. Changing a Primary Residence into a Rental
If you currently own a home that was financed with a VA loan, and at some point move because of a relocation, military reassignment or for other reasons, you can rent the property out. You can then get a new VA loan to buy a new primary residence, which over time can build an investment portfolio.
3. VA Loan for a Fix-and-Flip Strategy
While VA loans are often ill-suited for fix-and-flip properties, a borrower could purchase a fixer-upper as a primary residence, live there while doing renovations and then sell the house for a profit. Remember that VA loans need homes to meet minimum property standards, so major rehab projects may not qualify.
Investing with a VA Loan | VA loan for investment property
Although VA loans aren’t technically meant for investment properties, savvy veterans and service members can make the most of them in these ways:
Investing in Real Estate through House Hacking
As we covered, you can buy a multi-unit home with your first home loan, live in one unit, and rent out the other(s) to offset mortgage costs. Because rental income can offset their monthly payment, this strategy effectively allows borrowers to live nearly mortgage-free.
Long-Term Wealth Building
If borrowers keep previous VA-financed homes as rentals and buy new primary residences with other VA loans, they can gradually build a portfolio of real estate over the years. Rental income can provide passive income on a long-term basis and appreciation increases equity.
Use VA Loan Assumability to Your Advantage
VA loans are assumable, which allows another qualified buyer to assume the existing loan terms. In a high-interest rate environment, this can be an enticing proposition, as it may drive up the property’s resale value.
Occupancy Requirements and Loan Limits
VA Loan Occupancy Rules
The VA requires borrowers to occupy the home within 60 days after closing. However, deployed service members do have an exception, as they can have a spouse or significant other meet the requirement.
VA Loan Limits and Entitlement
Borrowers with full entitlement have landing restrictions when it comes to VA loans, meaning they can buy homes without needing a down payment regardless of cost (as long as the lender approves). But if the veteran already holds a VA loan, his or her entitlement may be limited, which can affect how much he or she can borrow on another VA loan.
Advantages and Disadvantages of Applying for a VA loan for investment property
Pros:
- Zero down payment, releasing cash for other investments
- Lower rates than traditional loans
- Multi-generation diversity for this may also include house hacking potential
- Potential for sustainable rental income
- No mortgage insurance, minimizing overall mortgage costs
Cons:
- Owner-occupancy requirement restricts investment flexibility
- Cannot be used directly on pure investment properties
- Property condition requirements could limit fixer-upper prospects
- VA loans limited by entitlement restrictions
Alternative Loan Options for Investment Properties
If a VA loan isn’t available for an investment property, take a look at these alternatives:
- Conventional Loans: May require a down payment, but are more flexible for rental properties.
- FHA Loans: Like VA loans, FHA loans can be designed for multi-units, provided the home is owner-occupied.
- Portfolio Loans: Offered by select lenders, these loans have more flexible requirements for investors.
- DSCR (Debt-Service Coverage Ratio) Loans: Tailored for investment properties with qualifying income
Conclusion
Although VA loans are ideally for owner-occupied dwellings, astute borrowers may still leverage them to invest in real estate. Veterans have the incredible opportunity to build generational wealth with homeownership by house hacking multi-unit properties, turning single family homes into cash flow assets, and taking advantage of VA loan benefits. For maximizing the investment potential of VA financing (as well as giving lenders a reason to make loans to you) you need to understand the rules and limits.
If you’re a military service member or veteran exploring real estate investment, partnering with an experienced VA loan specialist is one way to help ensure that you’re able to find the best fit for your objectives.