Let’s start by clearing up the misunderstanding that has been perpetuated by online scammers. VA loans are “Not” supposed to be used for investment properties. The VA loan scheme was set up to help people who are in the military and/or who were in the military. It works under the idea that people in the military are at a disadvantage in the housing market because of their profession.
They perhaps don’t have the time to build a credit rating, save for a deposit, and especially to buy a house at the right time (since they may be overseas at the right time). The VA loan system is supposed to redress the balance, not to give people in the military an advantage to make money from investments. Nevertheless, if you are prepared to play by the rules, you can use your VA loan to help you build wealth strategically over the long term.
There Are Two Ways to Build Wealth
You can build wealth by buying a house and letting it out until the mortgage is paid off, and then hopefully, the house will have grown in value so that you make a profit. The second method is to use the VA loan to buy a fixer-upper house, and then use the VA loan to both buy the house and pay for certain (most) repairs. You then live in the house for a year or two and sell it. This is the classic flip-it-for-a-profit method.
Letting The Property Out to Tenants
The first is to buy the house, live in the house for as long as the VA lender says you should, and then move out and have tenants pay you rent. The VA lender is going to insist that you keep your house as your primary residence for a year or two. After that point, you can sell it, rent it out, etc.
Under normal circumstances, there is no guarantee that letting out your house will draw a profit. After all, letting a building comes with several risks that may result in big losses. Plus, while you are in another building paying rent, you are not making a very big net gain. This is even worse if your house isn’t gaining in value, if the tenants are causing problems, and if there are legal problems, squatters, insurance problems and so forth.
On the other hand, this method may work if you are on long tours overseas because for half a year you are having your mortgage paid while saving on rent from where you live. Also, there are many occasions where the VA lender allows you to take long military tours and still call your house your primary residence. Under those circumstances, you will have to strike a deal with the tenants about your mail, census data, and so forth. It would be more like they are house guests than tenants.
On a similar note, after living in the house for however long you have to, you may want to move into your spouse’s house. In those cases, you are still paying rent while the tenant pays your mortgage, but the net losses and net gains may be a little more favorable.
Buying a Fixer Upper
The VA loan company is not going to let you buy a burnt-out house for a few grand and then have you fix it up. When you buy your fixer-upper, it has to be a house that stands a good chance of maintaining its value.
Yet, there are several guidelines that say you can buy pretty shoddy houses with the idea of fixing them up yourself. There are even VA loan variants where they will cover the cost of your house and then the costs of quoted repairs. This is especially true if the repairs are on the roof, insulation, and any security or energy efficiency problems that the structure has.
Take care of the bigger things with your VA loan money, and as you live in the house, you fix it up with your own money. When the living period is over and you are able to move houses, sell, etc., you then wait for the right time and sell your house for a tasty profit. The goal is to walk away with a net gain, though doing so may take a little longer than you first expect. As you know, it takes a while for property prices to rise after you have fixed up your house, especially if the rest of the neighborhood isn’t doing too well.
What Can You Afford?
The VA loan system seems to favor cheaper houses. If you are able to pay off your VA loan faster, then you will stand a better chance of building wealth over the long term. When you look for a house, make sure you can afford the payments. Use a VA Loan Calculator like WhatsMyPayment and make sure you have plenty of money left over after you have made your payments. Do not make the mistake of falling into further debt after you have your loan because you want to protect your credit rating.
You can take out more VA loans after you have paid off your first loan, after which you can use VA loans as a quicker way to grab investment bargains when you see them. At that point, you will have experience with the VA loan system, and your credit rating will probably entitle you to a better interest rate.
Image by Mediamodifier on Pixabay
Author: Ivan Smirnov
Statements of the author and the interviewee do not necessarily represent the editors and the publisher opinion again.