Im taking advantage of the VA loan an IRLL during the pandemic

[Trent V.]

I am very excited about my current plan. It is not perfect and I am open to suggestions. I wanted to post what I am doing because I think there may be Veterans that arent sure how to take advantage of their VA loan programs.

My wife wanted a personal home before I bought rental properties and understandably so. The home we bought was 300k at a 4% interest rate and about 1000 dollars for closing costs. Current rents on the home should easily hit 1750/month. At those rental prices, we would be making just enough to cover the mortgage. We have cash reserves but Cap ex and Vacancy would essentially make the property unprofitable with next to nothing cash flow. We want to sell and move out of state. I did some very rough math. We have paid 21,000 in total mortgage costs over the last year.  If I were to sell the property I would be looking at somewhere around 16,500 in just agent fees along with approximately 2500 to 11000 in closing costs and make-ready repairs. ultimately we would have been better off renting a property rather than living in the house for a year then selling. 

Enter the VA IRLL program. Because my wife and I are veterans we qualify for an interest rate reduction loan program. Essentially as long as the same names are on the title we can get our loan rate reduced to 2.3%! This saves us approximately 275.00 a month in mortgage expenses. Meaning that now even with Cap ex and vacancies the property will be mildly profitable. I understand it doesn't meet the 1% rule but it's profitable and I have virtually no money in the house if you don't count me paying into the mortgage for the first year.

Next step. We are going to use my VA benefit instead of my wives to buy our next home. The VA caps loan values at 510k. We are planning to buy a home right around 400k. This means we would be leveraged at somewhere around 700k. I have heard that we would have to pay the difference to get a VA loan meaning we would have to come up with 190k to get into a second personal home.

To count your rental as income you have to show two years of rental history but here is the interesting part. If you have a signed lease and two "months" of rental income you can get approved for your second property with little to no cash down. They don't count your first mortgage as a liability since it is being covered by your renter. so you don't have an asset but you also don't have a liability as far as the bank is concerned.  

We are essentially doing a version of the house hack and the BRRR method with the VA loan and refinance. I think we will be able to get great tenants as well because we are in a B plus type neighborhood. The people who rent from us will not need to be renters they will most likely just be in transition. At least that is my hope.

I am open to any constructive feedback about this move. I feel like its a decent plan although it's not the best cash flowing property something is better than nothing. Moving forward I will use conventional financing and use the equity from my first rental to purchase more rental properties further increasing my leverage but also my cashflow. 

Feel free to ask me any questions if you can use the VA loan benefit. I think I have a pretty good feel for the process at this point.

[Thaddeus Skaggs]

Trent,

     After reading everything above, it sounds like you're in a good spot.  Sure there are some uncertainties, but you sound like you know what you're getting yourself into.  The only part that doesn't make sense to me is going for a 400k house for a personal home with all the other additives like the 190k difference.  Depending on the market and what you're able to do with it, I see this house being your future problem.  I agree with Bruce in going a little light on house 2, so that you can really maximize that springboard you talked about.  Maybe doing so could allow you the opportunity to buy a 250k house to live in (maybe rehab if that's a low $ for your market) and a 150k house to rehab, still coming out to 400. 400k for a residence just doesn't seem to bring money in the way that I think you are able, is all.  But, investing while serving isn't particularly easy, I'm finding. 

Let us know what happens or how it works out for you!