Primary Residence, same rules as Investment Properties?

Question

1.) I am wondering if real estate investors generally purchase their primary residence with similar rules as their investment property. I am about to purchase my first home and feel guilty for not being too sure on how it is as an investment property.

The house I am about to purchase if brought up to the surrounding areas standards would definitely increase in value, (estimate double the purchase price) but should I look at living there for a couple of years as holding costs? I have to pay rent or have another mortgage somewhere right?

2.) Also, my original plan was to use my VA entitlement to purchase a small home that would cash flow well if rented out. Then, when I get married (1 yr) purchase a larger home for the two of us and rent out the first. Then when we have our first kid, move up again and do the same. I believe I could use the VA loan program to get 2-3 properties with no down payment. In order to do that I would have to live in the properties which means they have to be in my area, Las Cruces, NM. Although I don't think I can find good cash flowing properties without paying down payments, I can definitely have 2-3 rentals covering the mortgage and insurance costs. With the climate and a lot of newly built inventory, maintenance costs would be low.

Am I crazy to not take advantage of this scenario?

If I purchase this house, I would have to come up with down payments for any cash flowing properties. I would save money at a slower rate also. But I would also look into better cities to buy cash flowing properties and not be limited to where I currently live.

Elizabeth Colegrove · Answer

@Kyle Stines My husband is active duty military. Every house we buy is bought to be a rental we just live in it first :) We used the VA on our first two personal properties. Now that we have used up the VA we are using personal property loans. We also buy houses using personal property loans. As for the VA. The rule requires you to live in the house for 1 year.

David Jayne · Answer

Kyle I'm active as well, but I haven't used any of my VA entitlement. I wish I had known about the program earlier. No, you are not crazy for using it. You would be crazy not to! With that said, I would be conservative, especially at first. Don't overextend yourself or get to where you can't sleep at night worrying about it. RE investing should be an enjoyable experience. Most of the time... R/ David

Elizabeth Colegrove · Answer

@Kyle Stines The VA's were zero down. Our moto is to put as little as legally allowed down whenever possible. Now that the VA's are used up we are using conventional 3.5-5% loans to buy personal property. Our "rule" is that you have to have at least $200, safer $300 clearance from expenses each month. We found that as long as the house is not super old, or need all new systems (roof, siding, windows, ac, heater, water). If the house does not clear than there is no point in buying. At that point you should rent. While we do try to "collect" houses for long term growth. They cann't cost us now. Again it is whatever your goal is. Our goal is to retire at 44 with a navy pension if all goes well. So we acquire houses now, in good area with good tenants A+. Our cap rates tend to be 8-9, so not amazing but low maintenance tenants. They also are in a GREAT area so we "might" see appreciation but I certainly don't count on it. We do count on the houses paying themselves off. I handle the management so we can keep our costs down. We operate our houses like "South West". So far so good, I did want to caution you that your above plan nor ours will not work forever. We are going to take advantage of it till the tide turns. At some point it will not, the markets will recover and at some point they will even be higher than the recovers we saw before the last peak. That is why we have our rules and cap rates. This allows us to keep numbers on it. When we can not longer cover our mortgage with some to spare we currently plan on not buying any more. If we move to an area that way we will rent and use the money from our houses to pay them off. If your are still in the military you will notice that some areas do not appreciate. If you want to build cash cows, than those are the areas I would invest. I would probably want 10-15% cap rates. I would also watch the tax rates. Those tend to be higher in non-appreciating areas. Sorry for super long answer. Hope it made sense

Kyle Stines · Answer

@Elizabeth C. Thank You! Did you use zero down payment with the properties obtained with VA loan program? If so, does the rent income cover the payments or create some cash flow? I know it depends on my area and the deals, but just curious about your experience.

Elizabeth Colegrove · Answer

@Kyle Stines If you are in the position to do this strategy than yes you are crazy to not do it.

Kyle Stines · Answer

Sorry, I meant crazy if I DO NOT do it.

Elizabeth Colegrove · Answer

@Kyle Stines You are not crazy for taking advantage of the ability to buy 2-3 rentals. We plan on doing the same thing. We are just very careful that we don't commit fraud and follow the rules. AFter that Go for it !!!

Kyle Stines · Answer

Thanks again for the discussion everyone. I would still like to hear if I'm crazy for not taking advantage of it if I can build 2-3 rentals over the next few years with no down payments.

Bill Gulley · Answer

Steve, I didn't mean to imply VA does non-owner occupied, they don't, as I mentioned, you need to live in the property, after a year they'll let you move on and it can be rented. VA entitlements are not to say you get a loan, you still must qualify. In the example above, 160K entitlement, if you use 120K on one mortgage, you only have 40K left, under the minimum most likely as lenders still are making the loans under their lending guidelines, the VA simply insures the loan they don't make it generally. (They can in underserved areas under other circumstances). If you have a sufficient amount of your entitlement available to get another loan you could, at least that's what I did back when, but you're also qualifying for a new loan with the other being considered. Now, that may have changed but it was to the insured amount. The reason for this is due to military moving around and being eligible for home loans. Yes, VAs can be assumed, however your entitlement is not credited back to you until that loan is paid off. My VA days were awhile back, best to check on current situations with the VA and see what your lender offers. :)

Kyle Stines · Answer

I am still slightly confused, and I believe the use of VA loans on multiple properties is a grey area and only found out once its actually tried. One example of being able to reuse it is moving duty stations and it's not necessary to sell the first out when you can rent it out. Another, which I wanted to use, was having to increase the size of my house due to increasing family size. The max loan limit for my area, and most of the U.S. is 417k. My understanding is that you can end up using the VA guaranteed loan on any combination or number of loans as long as the add up to be under 417k. The grey area is the reason you have to move, and the length of occupancy.