How would I afford a $600k property on an e-4 salary?

Question

Hi,

I plan on join the military soon, and due to the mos I’m choosing i will probably be in san diego. My question is how do I get funding for rental properties when I make so little. I would like to buy a fourplex, and sometimes they cost 1 million plus in San Diego. Most banks wont do a VA loan with a debt to income ratio greater than 43%. I think its the same for an FHA loan too. Any ideas?

I await your response,

-Sam

Andrew Postell · Answer

@Sam McHargue lots to this but I will do my best here:

• If approved to live off base you will receive BAH - Basic Allowance for Housing.  This is pay you will receive to live off of the military base.  It is based on your market/duty station.  So the higher housing costs are, the more BAH you will receive.
• You should be working with a lender that allows your rental income from your property to be used IMMEDIATELY.  That rental income from the other units will help you qualify for the loan.  But not every bank will use it.  Interview the lenders when you get to that point and make sure they can use it right away.  None of this "It needs to be on tax returns" or "we need a lease"....they need to be able to use rental income even if the units are completely empty.
• "Debt to Income" - 43% is way too conservative.  At minimum you should be working with a lender that uses 50%.  They can go up to 55% for FHA/VA.

Hope this information helps in some way. Thanks!

Dan H. · Answer

I think you should start house hacking a duplex in a working class area that needs some TLC.  You may be able to purchase this for low $400s.  I saw one that sold last week for $450K.  Use your VA for low down and BAH to reduce the amount required from your salary.  While living in the unit, perform the necessary TLC.  Once complete switch units and rent the unit with the TLC at market rate.

If you get deployed to a different location, rent the unit that you are vacating.

I know the cash flow ratio is required for 80% LTV to achieve some cash flow but I do not know what the cash flow ratio needs to be at the high LTV of a VA loan.   You will need to run some numbers but I expect it to be in the area of 0.8% ratio (post TLC)  which will be challenging to find but not impossible.

BTW we looked at a property (North Park) this weekend that was purchased quite a few years ago for something like $150K (I forget exact amount but close to this) on a VA loan.  I am assuming the purchaser placed low down so possibly at low as $5K or $6K.  They were asking $1.29M.   They may actually get their ask from someone who has bigger vision of value adds than we have (the zoning provides some potential opportunities but is beyond our expertise).  That is one nice return especially because they refinanced it many years ago (they have refinanced it a few times but the first was for over $300K) pulling out all of their initial investment.  So none of their capital invested for quite a while and getting close to $1.3M for the RE.  A very smart use of someone's VA loan in San Diego.  Good for them.

Good luck

Ryan Sajdera · Answer

Have you considered doing any green to gold or OCS program to become an officer? That could help your W2 income out and maybe make you look a little more appealing to the banks.

I would find a cheaper home and house hack. You could also consider buying a SFR and renting out the bedrooms to some of your peers! That’s a good way to live for free and then you can sell your SFR (hopefully) for a profit when you PCS if you don’t want to hang onto it! It could really throw you ahead. I’m not sure if you are married or not, but its definitely a talk you will want to have with Household 06!

Justin Tahilramani · Answer

Sam - the realistic answer is that you cant afford a $600,000 property as an E4. An E4 in San Diego brings home around $53k/year BEFORE taxes and SS. Purchasing a property that expensive would be irresponsible. What happens when you PCS to a Low Cost of Living area and your BAH nose-dives to $800-$1100/month?

Justin Kane · Answer

@Andrew Postell is spot on, but also, if your goal is to keep, manage and maintain for your portfolio then perfaps also network with some partners to find some MF deals you can partner with

Sam McHargue · Answer

@Andrew Postell thanks thats very helpful!

How would I afford a $600k property on an e-4 salary?

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