First time homebuyer down payment or no down payment?

Question

Hello BP community! I'm brand new to this whole REI thing with a grand total of 0 investment properties...but looking to grow! I'm in the Air Force and will be stationed in Enid, OK for the next 3+ years. Looking to buy a few rental properties while I'm here to start building that asset column. I have some renovation experience so I was looking at doing some version of a live-in flip for a year (to take advantage of primary residence mortgages), move out and start renting the property, buy a new property, and repeat for 3 years - ideally with 3 cash flowing rental properties when I leave.

I have a home I'm looking at that my relator thinks we can get for $180,000 and based on similar listings can rent for around $1400/month...its a new-ish build so it won't need a ton of reno other than a few cosmetic upgrades (<$5,000). My question revolves around what type of mortgage should I use and what kind of down payment makes sense?

Option A: VA loan with $0 down. The property will cash flow around $125/month after I move out (conservative estimate)

Option B: Conventional Loan with 20% down ($36,000). The property will cash flow around $275/month because of the lower mortgage payment (again, conservative estimate)

I've had a ton of friends use the VA load with nothing down on primary residences turned rental properties and it seems like a good way to preserve capital - seems smart especially if I'm gonna be purchasing additional homes in the next year that may need $20,000+ in renovations. On the other hand, I've been told by my father-in-law as well as my relator that if I'm able, I should save my first time homebuyer VA benefits for when I buy  a more expensive house in the future and put 20% down on a conventional loan to pay into this first home's equity, and lower the mortgage payment which ups the cash flow another couple hundred dollars...also seems smart. My biggest apprehension is that this $36,000 down payment is going to cut pretty deep into my cash reserves (pulling this out of the stock market) and only leave me with about $15,000 for future ventures (without dipping into emergency fund/savings).

Not sure what the right answer is here. Thanks in advance for the help!

-Alex

Anna Laud · Answer

@Alex Brant

Hi Alex!There’s not a limit on the number of times you can use the Veteran’s loan program because it’s a lifetime benefit. Maybe they are speaking of the entitlement portion of the VA loan- like the guarantee of the loan if default occurs broken down in preliminary and secondary entitlement.

That can be a little market dependent on the amounts. It basically means that  if you used your initial entitlement amount, once a loan is paid off, you can request to have full entitlement back one time. Now depending on the number of times you’ve used the program, your specific military service in some cases, and the loan type there are funding fees for the VA loan program; if you’re at 0%-4% down, it’s under >4%, 5%-9% down, it’s a little over 1.5%, and over 10% down under 1.5%.

So if you wanted to sell the investment after time and use this as your primary & house hacking until ‘dream home’ days, you could sell and pay off the original loan balance and go this route or pay off original loan amount without selling and keeping it and apply for the one time benefit restoration - which is not the same as entitlement re- installment for active/permanent change of station orders or foreclosed upon properties.

It depends on where you are too if this is worth waiting on as in some areas (higher price point markets) the ‘bonus entitlement’/2Tier  for first time users of the program can be higher. Based on your COE (Certificate of Eligibility) you could qualify for basic plus bonus and that could be the ‘dream home’ consideration they are speaking of for first time VA loan usage.

Best advice I can suggest is speaking to a VA lender in your area/state of loan origin  for full clarification on this before deciding what to do and have them walk through the options/numbers with you to fully get the best use out of your VA loan benefits!

Hope that helps = )

Chace Fraser · Answer

@Alex Lesar you have lots of options... including an FHA loan. Let's think about numbers real quick...

ROI on Conventional 20 percent down ($36,000) for $275/month ($3,300/year) cash flow = 9.16 ROI

ROI on FHA 3.5 percent down ($6,300) for (complete guess) $150/month ($1,800/year) cash flow = 28.57 ROI

ROI on 0 Percent down for $125/month ($1,500/year) cash flow = INFINITI

A strategy you could implement might look like this: buy #1 with your VA, a year later #2 with FHA, a year later Refi #1 into conventional, buy #3 with VA, a year later Refi #2 into conventional, buy #4 FHA. And on and on and on. This would preserve capital and allow you to leverage. It may get challenging to have enough equity as fast as you like to refi into conventional loans and all of the properties would have to be your primary residence.

Also, don't let people tell you PMI is a bad thing. It's a great thing because it allows you to put less money down, use more of other peoples money, gives you a higher ROI, and it goes away after you have enough equity (just a few years of appreciation). Just don't be dumb and not have ample money in reserves (8-12 months of mortgage payments) for when $hit hits the fan and a global pandemic rolls around.

Matthew Brill · Answer

VA all the way. If you can cash flow and are in growth mode the lower the down payment the more juiced the return. I will add that I would do a low down payment conventional mortgage (95% LTV) over a FHA loan (less fees and don't have to refi to drop off the PMI).

Alex Lesar · Answer

Wow thanks for all the help everyone...you guys are on top of your sh*t. Looks like its time to talk to my lender and get his thoughts on it. Seems like the best move is to use that VA loan, preserve existing capital for repairs/future expenditures/worldwide plague, and then refinance into a conventional when it's time to use the VA loan again.

@Anna Laud The thing I'm worried about is using up those first time home buyers benefits on a $180,000 SFH in a relatively cheap market in Oklahoma when I might be kicking myself in a few years buying a $500,000 elsewhere without those first benefits. I suppose money now is better than money later if it helps me grow my real estate portfolio in the meantime but I'll definitely be looking into what'll be used up that first time.

@Chace Fraser Great point looking at ROI, ...makes the "no money down" hype you hear about make a bit more sense. Love the VA->FHA->Refi plan...great way to leverage while keeping capital in the bank for value-adds, additional purchases, sh*t hitting the fan, etc.

Doug Spence · Answer

@Alex Lesar Welcome to the awesomely addicting world of REI! There are lots of fellow military members on BP that are also investors, and we always love to see more people getting into it! Its such a great way to build generational wealth for you and your family.

Regarding your question, I think you should find the best VA loan specialist in the local area and pick their brain. My first thought is: you should buy the property using your VA loan, pay as little down as possible, and preserve your capital for repairs and reserves and possibly for buying another property on a conventional mortgage. One question I would have for your VA lender, is "if I use the VA loan, can I refinance out of the VA loan into a conventional mortgage in a few years to free up my VA loan for a more expensive home purchase". I believe you can, but I'm not an expert on VA loans.

Best of luck and keep us updated!

Dmitriy Fomichenko · Answer

@Alex Lesar congrats on your decision to get started in REI!

First time homebuyer down payment or no down payment?

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