How do you leverage in NJ (high tax area) using VA vs 203k

Question

How's it everyone? Long time lurker here. I'm located in a high tax state, (northern NJ) specifically and I'm intending to acquire my FIRST multifamily (2fam) by August 2018 initially using the VA loan (s/o to @GrantCardone for convincing my wife on this idea). I've been searching and quickly analyzing properties sent by my realtor and using Redfin just as a quick basis. Here are things to consider:

- VA loan requires you to purchase a "move-in" ready/habitable property

- Considerable Property taxes

- Most properties in VA standard are in market price

- Operating costs (medium to high) - being conservative

- Cashflow = almost non-existent

I know this is not enough information to conduct a proper analysis. But for those of you who are familiar with the state, I'd really appreciate your input.

Entering at a "market price" and considering factors such as Vacancy, Prop. Mgmt, Capex, and such does seem to give any cashflow opportunities. Although, I can save by taking the risk and having a tenant pay half of my mortgage on a 2fam, BP doesn't think its worth while without a positive cashflow.

Now, maybe if I go to 3-4 family, numbers would start to make some sense. And unless I go to the 203k loan route, vice to my initial VA loan plan, cashflow would be more feasible.

For those of you who have used the VA loan living in a high tax state, how do you use the VA to leverage? My thought process was, even though you pay more interest for the life of the loan (due to no down payment) that would cost less FOR ME since I would be renting it out after the required live-in requirement by the VA. Meanwhile, I can use my reserves for something else or leave it in the market as it is.

OR

Opt out on the VA loan idea, use the 203k rehab loan to dive into my first real estate deal, use my reserves as down payment, learn the process of rehabbing, earn some equity after the repairs.

Pardon if my thought process wasn't organize as I'd like it to be. So thanks in advance for your patience.

Noreen Eddy · Answer

Hi Keith! I'm in NNJ also! Good for you on having a clear goal + deadline! Also, your habit of analyzing will serve you well. We loved redfin for our area - often finding properties before our realtor did. Hubby and I closed on a 203k here October 2016. I'm not familiar with the rules of VA loans, but 203k properties are not usually "move-in" or "habitable." It seems that 203k was created (at least in our case, it was applied) because the property was otherwise uninsurable on a regular mortgage. Example: Our house had plumbing issues and was winterized, having been a foreclosure. We could not turn on the water during the inspection. Your average bank won't mortgage a property like that. 203k allows you to buy a property with a laundry list of work to do yet still get a mortgage. Perk: only 3.5% down and a construction loan wrapped into your low-interest rate mortgage. (Construction loans otherwise cost a lot more than the 4% average of a mortgage). I agree with @Ro Maga - 203k breathes a big fat hassle, inevitable delays (ask me about lead paint...), and red tape... but it's worth it. We were able to refi into a conventional loan this summer (goodbye, ugly PMI), and our appraisal reflected a $70k increase in value to our home. Not bad for $10k down and $25k on rehab (add'tl to 203k rehabs). Other considerations for your number crunching:1. Interest rate on a 203k - if you have a good lender - should be comparable to any other conventional loan. 2. 203k FHA loans have a credit score requirement. Make sure your reports are neat and tidy! 3. PMI - mortgage insurance - is a p.i.t.a. and will never go away unless you re-fi. This might affect your math! Ours was approx. $200 extra per month on top of mortgage and taxes. We made it our mission to be rid of PMI in less than a year. We were successful thanks to a lot of sweat equity. Hope this helps! Happy hunting! PS if you need a mortgage guy who has experience with 203k, send me a message!

Ro Maga · Answer

I have no experience with the VA loan, but the 203k is worth it but to say that the process is difficult, slow, and frustrating at times (a lot of the times) is an understatement. Was it worth all the hassle, and the multiple delays, and the ton of red tape? Yes. You probably want to meet with a lender and get preapproved for a 203k and start looking. NJ is a very competitive market as you know, and anything with a potential upside in a good location will receive tons of offers, including a few cash offers within a few hours of being listed. Also, if you go the 203k route, keep in mind you will be forced to use a contractor for anything with 2 units or more. You can do side repairs on your own but not with loan funds.