Using VA loan to start out

[Dustin R.]

I’m new to the site and I haven’t made my first deal yet but I've been working on a plan. I’m very interested in the long term buy and hold strategy, however when I get a few rentals under my belt, I’d like to also branch off into flipping. I feel that my current situation doesn't give me enough time for flipping, and I currently do not have the network in place to manage a flipping business. Due to my work schedule and to share the workload and some of the startup costs, I’ve enlisted the help of a friend who is also interested in real estate as a partner.

About us

I'm 25, not married and currently rent an apartment in Long Island. My job will be very demanding for the next year or so, however once my training is finished I'll have plenty of time off, and a more flexible schedule to pursue real estate investing. I currently am saving as much as I can to put towards investing, and I have about 15K available to loan out of my Thrift Savings Plan (401k) . My partner is 24, single, renting an apartment, and starting a job with the electrical union back in the Pittsburgh area, and has about 5k to pull from in his TSP. Both of us qualify for the VA loan due to our military service. Neither of us have ever owned any real property.

Our Roles

I am working on my PA salespersons license for the sole purpose of gaining legit access to the MLS. I do not plan on pursuing a career in RE sales; however I wouldn't mind doing my own deals to save money. My role will be finding deals, building relationships with private money lenders, and coming up with most of the money for our early deals.

My partner’s role will be on the front end of the business. He will be dealing with some of the repairs, managing contractors, and dealing with tenants. Hopefully his new position in the electrical union will help us build a network of good contractors and property managers.

Our Plan

Our plan us to put down as little money as possible for our first deals. For those who are unfamiliar, VA Loans allow up to 100% financing. First we will use his VA Loan to acquire an owner occupied multifamily home in the Pittsburgh area. I will contribute rehab money from my 401k loan, and he will contribute using his 401k loan. I understand for the first part of the deal I may end up contributing more than he does due to our financial situations. I am ok with that. The goal for the first deal is to find a property where he can live while having tenants pay his rent, and save up enough for the next deal.

Once my current rental lease is up around October of 2014, I will use my VA loan to get an owner occupied multifamily here in Long Island that I will live in. We'd like to try to live rent free in our multifamily homes to let us save up for the next deals.

Once our occupancy requirements are satisfied with the VA loans, we will find 2 more multifamily properties. The idea will be the same: we both find our own multifamily homes that we can live in and have tenants pay our rent. This process will repeat until we are big enough and ready to expand.

Questions

1. Do you think this is a good plan?

2. Does anyone have thoughts on the use of the VA loan in this situation? It seems as though the occupancy requirements are sort of vague, so hopefully someone can clear it up for me.

3.. Should we instead consider the FHA 203k loan for our first purchases? Are we able to use FHA 203k for our first deal, then the VA loan for the second? Does it work the other way around?

4. What sort of business entity would you recommend that we set up for this plan? I'm thinking LLC is the best for now but if we plan on getting into flipping down the road, maybe there is something else that we should consider? Also we plan on splitting everything 50/50.

5. Is unordinary for someone to put up more money up front than a partner when starting a business like this? Should I be more concerned with having a greater share of ownership since I will be putting up more money to start?

6. Any additional thoughts or things to consider?

Anything BP members would like to add would be great. Thank you in advance for the replies!

Dustin

[Matt Devincenzo]

Welcome to BP! I'm a vet as well so I hope I can help since I've done a decent bit of research on the VA loan specifics.

I'll answer each of your questions below specifically, but first I'll give my opinion. If you are both using your VA loans in separate locations, I really see no benefit to either of you in "partnering". It seems to me you're making the simple complex. I'd just use your VA for your multi fam and not have your friend involved at all. Same for him on his property.

1. Do you think this is a good plan?

I don't see how either one is really benefiting the other, but maybe I missed something.

2. Does anyone have thoughts on the use of the VA loan in this situation? It seems as though the occupancy requirements are sort of vague, so hopefully someone can clear it up for me.

The occupancy is the same as other OO loans, 12 months then you can move out. During that 12 months you must actually live there, there have been several "creative ideas" posed to get around it and they would all be fraud if you did them. (which I understand is not your intention just mentioning it as others have suggested "my friend told me...." and it's always a bad idea)

The vague part that comes up is reusing your VA loan. So you have a VA "entitlement" which is a dollar amount figure once you use that up you can no longer get it again until your previous VA entitlement is released by paying the loan off or refinancing. But say you only use 50% of it on your first property, you still have the other 50% you can use on your next home. Here's a link that is clearer than my explanation I'm sure :)

3.. Should we instead consider the FHA 203k loan for our first purchases? Are we able to use FHA 203k for our first deal, then the VA loan for the second? Does it work the other way around?

It will work either direction. Here is something to think about you've mentioned "repairs" a few times which makes me think your plan is to find a distressed home. You will likely need to be looking at move in ready homes. VA standards for a loan are higher than FHA or any other inspection standards, reason being, they're willing to lend 100+% LTV so they want a secure property that doesn't need work as their collateral.

4. What sort of business entity would you recommend that we set up for this plan? I'm thinking LLC is the best for now but if we plan on getting into flipping down the road, maybe there is something else that we should consider? Also we plan on splitting everything 50/50.

VA loans are for individuals and can't be made to LLC's, so just keep everything in your personal name to start out. The whole LLC/entity thing is going to be complicated for no reason at all right now.

And back to point #1 I don't think you should partner with each other currently, there is no material benefit that I see either of you providing to the other. I'd be friends and support one another as sounding boards and for advice for now, and in a few years when each has built your own net worth some, then you can provide each other with some sort of benefit to partnering.

Also if you're creating an entity you're doing it for one thing most likely, you keep your rentals separate from you flips. You create an LLC for your buy and holds, you create a different LLC or S-corp or whatever for your flipping. This is because the whole point of the entity is for asset protection, there's not a whole lot of asset protection to your flipping business if everything is in one LLC together. If someone slips at a rental and sues the LLC that holds that property, and all your properties you are flipping are in that LLC then you can lose it all. And if you have someone hurt at one of your flips, then they can come after your rentals .

There are also tax benefits to different entities for different business ventures, but for now I'd wait on using any sort of entity.

5. Is unordinary for someone to put up more money up front than a partner when starting a business like this? Should I be more concerned with having a greater share of ownership since I will be putting up more money to start?

Nothing is usual or unusual, it's all up to what you guys want to negotiate. Get whatever you decide in writing, and go see a lawyer to draw it up. Things he'll make you figure out you would have never thought of, what if you die, he dies, you file bankruptcy, he gets married and wants to cash out but you want to hold on longer, can you buy him out, if so at what value today's market value or his basis in the property or whatever amount he wants to decide, who determines FMV for a buyout.....you get the point.

6. Any additional thoughts or things to consider?

I'm sure you'll have more questions, never hesitate to ask.