Should you use the max amount of your preapproval?

Question

Using my VA Loan my preapproval goes as follows:

1-Unit: $484,350

2-Unit: $620,200

3-Unit: $749,650

4-Unit: $931,600

I live in Chicago, IL and I am tempted to buy a 4 unit in a great neighborhood (and live in the basement) at or around my max approval; if the numbers work of course, but even if they don't and I have to make up the difference of $400-$800 dollars, i figure its worth it  to be able to control a million dollar property in an A class area in Chicago. Plus it could act as a forced saving and buy the time I retire and its paid off. I'd be winning! Anyway my concerns are: 1. I only make 5k a month. and 2. If there's a vacancy, I have a large gap in rent to cover, with the mortgages ranging from $4,750 to $5,438.

Anyway, I'm curious to get your thoughts? What actions, advice, tips and recommendations do you have you me.

Thanks.

-Louis from Chicago.

Jeff Burdick · Answer

Have reserves and don't cut things too close.  You will have vacancies, you will have repairs, you will have maintenance costs.  Account for all of these.  Things break.  Units often need to be painted during turnover.  Things wear out.

I think the idea of buying a four unit(though there aren't a ton of them in Chicago...the majority are two or three flats) and living in the basement while your tenants pay your mortgage is a great idea.  But really crunch your numbers.

Tom Shallcross · Answer

Agree with @Aaron K..  You will have vacancy and adverse situations that require reserves.  Leverage is fine and dandy (especially when others pay it for you), but you need to mentally walk-through all scenarios and ensure you have an answer for all angles of Murphy's Law.

Aaron K. · Answer

If you couldn't afford a vacancy don't buy that property, I think what you'll find is that there is a sweet spot of where the numbers work and a property where you want to live, some properties will have great numbers but be in less than desirable areas.  Others will be in great areas with meh numbers more money usually does not equal better returns on 1-4 units especially if the limit is $900k plus

LOUIS LEATHERS · Answer

It did, thanks!

LOUIS LEATHERS · Answer

2019 VA Loan revision. They revise every so many years. and its also dependent on your location. like I think its 1.2 million if you live in CA.

Brian Garlington · Answer

@LOUIS LEATHERS

How did you get approved for those amounts on a VA Loan? As a veteran, it's been my understanding that the max you can use for a VA Loan is about $729,000 or so even on a four-plex and even then it has to be in a hyperexpensive market like where I am in the Bay Area? Now I do know a few months ago, a bill was passed to eliminate the VA Loan limits but I was told that this won't go into effect until January of 2020.

Have you found someone who is doing VA Loans for those amounts above?

LOUIS LEATHERS · Answer

Thanks everyone, for your response. I'm definitely interested in getting into one of those A class neighborhoods, I would have reserves to cover and emergency or vacancy for 5 or 6 months. It is scary that mortgages are more then my monthly income, but even harder is finding a property that cash flows using a VA loan. Any suggestions on that?

Michael Facchini · Answer

@LOUIS LEATHERS - what's arguably more important than your personal, monthly income is what reserves/rainy day funds you have.  The beauty of that VA loan is you can buy a nice multi-unit with minimal capital outlay.  If that leaves a fair amount of capital in your pocket to cover, say, 3 months of vacancy and a little left over for that fridge that will die one day, then I'd argue you're on the right track (most likely).

On one side of the coin you don't want to over-leverage yourself, however I don't disagree with your spending a little more to get into an A neighborhood with higher rents and more reliable tenants.  I've personally found very little vacancy on my higher rent, more expensive neighborhood, nicer apartments.  Also, sometimes spending a few bucks more gets you into a better building with less deferred maintenance and issues.  Does that save you from $10k in windows you need to replace because they haven't been taken care of by the seller?

Therefore, I don't think it's a bad idea to spend a little more if you get a little more...and you have savings to back yourself up in the event you have a rough month or two.  Hope that helps!

Jeff Burdick · Answer

This wasn't directed towards me...but which neighborhoods all depends on what your goals as an investor are.  And since you'll be living there, it also depends on where you'd like to live.

LOUIS LEATHERS · Answer

@LumiIspas you sound really knowledgeable. That was good info. Do you invest in Chicago? and what neighborhoods would you recommend I look into?

Should you use the max amount of your preapproval?

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