How to Use The VA Loan to Build Capital For Real Estate Investing

I still hear it all the time: “I’d love to invest in real estate, but I don’t have any money!” While the first part of this statement is undoubtedly true (who wouldn’t want to enjoy the awesome benefits of real estate investing?), the last part about not having the needed money is only partially true for some. If you are active duty military or a veteran, you have a huge advantage over everyone else in the world when it comes to investing.

What is it? You may not have money now, but you have access to money through the power of the VA loan!

Let’s explore this concept of growing some working capital by diving into my personal journey after leaving the Armed Forces. It goes a little further than simply taking advantage of my VA loan eligibility.

Disclaimer: there is no need for me to give specific numbers from my experiences. The numbers are irrelevant, as I too started with ZERO dollars out-of-pocket. You can do this same thing in your local market, but you will also need to be agile, flexible, and adaptable during this process. It’s not easy, but it can be simple. I hope this article at least helps you start thinking differently.

If you are single—too easy! Just commit to this process and you’re on your way. But you must be willing to take action! If you are married, make sure your spouse has the same military-specific real estate education (at the very least) and understands the strategy before you begin. If you are married with kids, this process is easiest to execute before they are of school age (or at least in the early years of elementary). As you read this, notice that each of the three strategies my family was able to implement are different. We had to use all our industry knowledge and take some educated risks to accomplish different exit strategies to achieve each desired result.

The Process and Results

In 2011, I left a career in 160th Special Operations Aviation Regiment and headed back to the San Francisco Bay Area to pursue a W-2 job near my wife’s family. It was a good job with a great company that paid just enough to get by in the crazy Silicon Valley.

After about a year or so of renting, when my wife was pregnant with our second son, we decided to start looking for a home to buy. Nesting had begun, or so we thought. Now, let me address this right off the bat: Was 2012 a good time to buy? It sure was. So, for those of you who read this and say, “Well, you caught the market at the right time!” Take a look at what’s ahead. A market disruption is coming again, inevitably, so spend the time NOW to prepare. Get educated and execute when the time is good for you. There is no crystal ball. But if you are reading this pre-2020, you are in an amazing position to capitalize on market fluctuations in the coming years. As I said, get prepared, be patient, then GET AFTER IT!

Here are the three strategies, in chronological order, that began our five-year journey live-in flipping our way to success with the VA loan. Pay attention from here!

House #1: Silicon Valley Suburb (Two-Year Hold, All Market Appreciation)

First, we ended up buying a 4-bed, 3-bath “duet,” which is really just an attached two-story home (kind of like a townhouse-duplex). It was a short-sale. The house was listed at a price we thought we could barely afford, almost the cheapest home on the market at the time. But we also knew the market was appreciating, and it was in a great neighborhood with good schools. For a kid from Iowa, who’d only used a VA loan to buy a $150,000 new-construction house Savannah, Georgia, to this point, I had major, major sticker shock!

Does lumber cost that much more in California? I digress. The cool part about this home was that it didn’t need any work. It came with all the bells, whistles, and upgrades. And the last buyer fell through after months of negotiating with the owner and bank. So, we secured a VA loan and offered full asking price the same day we saw it. Now, here’s where it gets good. Since there were almost no comps for a duet built in 2008, we ended up getting the home for what it appraised for—which was $50,000 less than the list price and our offer!

With House #1, we ended up using the two-year hold, full market appreciation strategy. This means, since we lived in it for at least two years, we would not have to pay any capital gains tax on net profits. Since this house needed no improvements, we relied on market appreciation alone as the vehicle for making a profit.

After two years, House #1 had appreciated 36 percent, which we then invested directly into House #2.

House #2: Beach House (Less Than One-Year Hold, Forced Appreciation)

As we were in the process of selling the Silicon Valley Suburb house, we happened across an open house in a nearby little beach town on the North end of Monterey Bay. This house was two blocks from a local beach, so the location was great. It was a four-bed, two-bath house, and it was pretty outdated. But it had good bones, and we could see that if we were creative, it had potential to be a major win.

We ended up putting about $50,000 into a renovation (where I did a fair amount of work) that included removing one full bedroom. Why would anyone ever do that? We realized that the neighborhood was slowly starting to turn over into an area of out-of-town retirees who wanted their retirement dream home. The Beach House had a weird layout, so by removing a centrally-located bedroom (turning it into a 3/2) we gained six feet in the master bathroom and four feet to the main living/dining/kitchen area. Outside, I stained the concrete driveway myself, epoxied the garage floor and installed a really cool copper outdoor shower with beautiful tile work – made rinsing off after a day at the beach a breeze!

So, we owned House #2 for less than one year and capitalized on forced appreciation (the rehab) alone. The exit for this one was a little more complicated because since I owned it for less than 365 days, I was going to have to pay short-term capital gains tax. In California, that would have ended up being close to 34 percent of all net gains! Ultimately, I did get a letter from my W-2 employer requiring me to move over 70 miles away — thus, no capital gains tax needed to be paid. Had I needed to pay taxes, I would have, and it still would have been an amazing profit.

In only nine months, this property had appreciated 29 percent and at an even higher price-point than House #1. Ultimately, we got a full-price cash offer on the Beach House from a couple from San Diego, then took the proceeds and moved on to our next live-in flip project.

House #3: Good Schools Suburb (366-Day Hold, Both Forced & Market Appreciation)

Third time’s the charm, right? We sure hoped so. To be honest, every time we moved into any of these homes, we wanted them to be “the one” that we would stay in forever. Since I’m handy and always thinking about real estate, they all ended up as live-in flips. I couldn’t help it, and my wife is a saint!

This East Bay Suburb house was a four-bed, two-bath home with a pool. It backed up to a 40-mile-long bike trail, and it was a block from high-ranked and very desirable school. We ended up putting $30,000 into superficial upgrades (three new garage doors, all new pool equipment, stained concrete, crown molding), plus lots of sweat equity too. For this one, I started thinking, Why don’t I look into selling this one myself? So for $384, several hours of online training, and a trip to Oakland to take the state exam, I got my California Real Estate Salesperson license. After hosting two open houses in a weekend, I found an interested buyer who was not yet represented by an agent. He offered full price. My broker worked up the paperwork (I only had to pay .5 percent) and ended up saving $70,000 on commissions!

House #3 was sold in 366 days. Why 366? Coincidence? Nope. I knew that at 366 days I would only have to pay long-term capital gains (as opposed to the higher short-term capital gains). So by contractually delaying the closing until that day, I saved about another 15 percent on what otherwise would have been close to 34 percent tax. Once we closed, I had my CPA calculate what taxes I owed Uncle Sam, and I cut a check immediately. Through a combination of forced and market appreciation, House #3, at yet again a higher price point, had appreciated 10 percent in a year.

If you are going to try this strategy, you can reduce some risk by keeping in mind that all of these houses had one thing in common: a great location and/or some desirable feature(s). This always helps with appreciation and attractiveness to sellers and will make your journey a little easier if you keep that in mind.

What’s Next?

OK, working capital is built, now what? I plan to explain in future blog posts. I will remind you that I started with ZERO money at the beginning. I had a supportive family unit that was willing to move and really work for it with me. It was not easy, but I hope this testimony emphasizes to you that the VA loan is a gift — a gift that WE earned.

Have you used the VA loan? Do you have questions about using one?

Share your comments or questions below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.