Most readers are already aware of the access that members of the military have to the VA loan program. This program allows owner-occupied purchases to take place without any down payment. Investors looking to keep costs low are excited but this program is deceiving in many ways.
You Generate Money When The Purchase Is Made
A VA loan requires you to purchase and occupy a retail residence. However, it is very difficult to generate income on a home like this. Purchasing a primary by using a VA loan in a market with high appreciation is not a bad idea. Anything less is a waste of your time. The market that is being considered must keep rising and an exit strategy is needed to capture the appreciation.
The buyer must also reside there for at least two years to steer clear of capital gains before running with it. That is the only way to benefit. For most investors, this is actually less of a benefit and more of a trap.
Any investor wants to make their purchase at a discount. Making money over the long haul is easy if the timeline is extended for a long enough period of time, but this practice is disingenuous and inefficient. The true objective is to purchase at a discount, obviously. The VA loan may allow for easy funding, but it is important to learn more about the best way….instead of taking the easy way out.
I’ve Used This Loan Product Myself
During my young, broke, naive days, all I knew was that buying was preferable to renting. A gross oversimplification, for sure. I went house shopping anyway. From there, I decided to use my VA loan on an inexpensive little condo.
At that time, I only had $1,100 to work with. $1,000 in earnest money was required to make the purchase. I had to tell them I needed the money back at closing. Looking back now, I’m still stunned that they allowed someone that broke to buy a house. Eight years later and this remains worst performing deal. I didn’t think it through. All I wanted was a house with no money down.
Related: How To Make Money From Cheap Houses
Purchasing investment properties with zero money down is great, but it is not easy. The program makes you purchase retail and this should diminish your excitement. Your portfolio is not going to receive the boost that you were hoping for.
The Devil Is in the Details
VA loans come with a funding fee.
VA loans come with no PI, but funding fees apply. Anyone bringing 0% down payments can expect a 2.15% funding fee. That’s high! This reduces your savings and removes much of the benefit. Those who are 10% disabled can ditch the funding fee. I’m not recommending this tactic to anyone but if you’re disabled, this is a benefit you can enjoy. Surviving spouses are also able to waive this fee.
It can be used for a multiplex.
This could be useful to some, but the same issue remains: it is a retail property. Living in one corner of a multiplex isn’t a terrible plan, but it leaves you with no equity and a weak cash flow. Do you want to tie yourself to one property and create a deal with zero wiggle room just to avoid a down payment?
Another Common Mistake
I was PCS 20 years ago (permanent change of station, a forced military move) and my plan was simple: purchasing a home at one duty station. From there, that house would be put up for rent and go buy another one at the new location. This might sound good on paper but it is not efficient or reasonable.
One of the top advantages that comes with purchasing more homes is economy of scale. Each property goes through the same process, wit the same market and the same people. This increases efficiency and lets you save plenty of money. A ground team is needed in any city that you make a purchase. Running a good business comes down to your ability to find the best people. The economy of scale advantage vanishes when you make purchases in multiple cities. Our ability to learn the market is also diminished.
Let’s say you have 5 locations to worry about. Now, you need to consider 5 different contractors, property managers and insurance agents. These deals do not provide any equity for 8-10 years and the sole benefit is avoiding a down payment. A lack of money can be tough to fix but everyone should solve this problem instead of purchasing a retail property.
Focus on The Best Deals
The VA loan traps investors because the focus is on building deal strategy for this specific loan instead of building an ideal strategy that works well overall. Chasing 0% down payments makes a mess of the process and causes people to focus on a minor benefit instead of focusing on how to overcome their funding issues.
These are the problems that truly need fixing. Using a VA loan to circumvent the issue is not the answer. Getting a VA loan without cash flow or equity makes it impossible to survive. Surviving economic turmoil and receiving great returns is essentially impossible. These are not trades that should be made for the sheer sake of avoiding a down payment.