Purchasing with a VA loan to eventually rent

[Jesse Streng]

I currently own a home in the Phoenix area with a VA loan and no money down. With a va loan you have to use it as your primary residence for at least 1 year. I am coming up on my 1 year mark in the home and am thinking about buying another home with a VA loan and renting my current home out. What is everyone's opinion on this?

This would be my first rental. My concern is that I am starting out with some slight negative equity in the home because they finance the VA loan funding fee into the mortgage. Is that a rational concern? I know I can get about $100 more than my Mortgage payment in rent so I wouldn't be cash flowing anything but I would be building equity at least. Are there any other factors that need to be considered?

[Dustin P.]

Hey Jesse, I am doing this exact thing in Tempe right now so I can give you my take.

I think it's a great idea as long as you will have the equity to refinance the VA loan at 80% LTV. You may have to do some improvements to the home to do this. I would also factor into your numbers that PITI will likely go up a bit since it's going to be an investment property now. Once you refinance you can regain your VA eligibility and use it to buy the next house. I believe they let you use the VA loan twice in any one commuting area.

I'll give the example of my house I just purchased. We used the loan about a month ago to close a $380,500 property in Tempe near Warner Ranch, 4/2 2400 square feet with a pool. Currently we are finishing up the remodel on it and will then move in, putting roughly $55k into it to do a complete upgrade. We liked this house because we knew it was undervalued. A model match 2 houses down went for $420k 6 months ago, better condition in terms of paint and landscaping but identical builder grade finishes.

A house right around the corner just hit the market at $560k, remodeled, and went under contract in 3 days. If that closes anywhere near that mark I know our house is worth $500k all day long. When the year mark is up we'll make the decision if we want to rent it. If so we will refinance, potentially pull cash out to recover some of the remodel money depending on where the appraisal comes in at and what rents are, and then use the VA loan again.

The biggest factors you have to consider are 1) Will you be at at least 80% LTV and 2) Will the rental cash flow enough to cover PITI, expenses etc.