Use my VA loan or current Equity to buy an investment property?

Question

I'm serving in the military and my current home is worth $367K with $218K owed on it.  If my calculations are correct, veterans can take out 90% of their home equity with a cash out refinance, which for me, comes to about $134K.

Here's my dilemma;  I can do another VA loan, but I would have to live in the new property and rent my current house out and make sure I have enough capital to cover mortgage for both properties depending on how long it stays vacant.

Or, I can do a cash out refinance WITHOUT the VA loan.  Let's say I'm looking at a house for $325K.  20% down is $65K.  That's instant equity.  Obviously I take that from the $134K.  I also put money aside to pay the mortgage for a full year, regardless if a tenant is paying or not.  assuming the mortgage is roughly $1.5K a month, that's $18K a year going into the house.  That's $83K of equity in the house in only 1 year.

That leaves me with $51K liquid to invest in another property if I so choose.

I know it sounds like I answered my own question, but is it better to do the VA loan with no money down, or use the equity I've already built in my current home without a VA loan?

Zach Wain · Answer

@Ibrahim Yamini - Thank you for serving our Country!

If you are active military I assume you will have a VA funding Fee on any cash out refinance or new VA purchase (this is waived for Veterans with a service connected disability).  This is important because this fee is financed, but it is a major closing cost that needs to be accounted for.

On all cash out refinances (VA), the funding fee is 3.6% of the loan size.  For your cash out refi scenario, $330,300 loan size will have $11,890 financed on top for the VA funding fee. Expensive!!!

On a new VA purchase, the VA funding fee is 3.6% with 0% down (it is cheaper when its your very 1st time using VA).  But, if you put 5% down, the VA funding fee drops to 1.65% which is much more tolerable.

My 2 cents, since you have equity in your primary right now, consider a cash out conventional loan to 75%-80% loan to value and that may net you $70k-$80k.  Live in the home for a year, and then rent it out and buy a new primary home using a VA loan with 0%-5% down (to reduce the VA funding fee).  That leaves you funds to continue to invest and buy other homes down the road, make repairs and upgrades, rinse/repeat.

DM me if you want to gameplan and come up with some more options.

Jason Howell · Answer

@Ibrahim Yamini

Your 119k figure is not correct. The most a bank will generally allow you to borrow on a house is 80% CLTV (Combined Loan to Value).  In your case that would be 80% of 367k minus what you currently owe.  This would be about 75k, but then you also have fees that will reduce that amount.

Edit: I'm not an expert, but this is my understanding.  Talk to a lender to be sure.

Grant Schroeder · Answer

@Ibrahim Yamini Thank you for your service! @Zach Wain makes a great point about the VA funding fee for a cash out refinance. I agree with him that doing a conventional cash out refinance up to 80% LTV would be the best play to save you money on upfront fees. This would still give you $70k -$75k to purchase an investment property or use your VA loan to purchase another primary in 12 months. If you are buying a single family investment property, you can put as little as 15% down, and there are solutions to avoid mortgage insurance.

An important distinction here, is that just like when you purchase a home as a primary residence, when you pull cash out of your primary residence, you need to live there for 12 months before you can go and get another primary residence loan. If you want to purchase right away, you have 3 options to access the equity in your home:

1) Pull Cash out as a Primary Residence & purchase an investment property. (If you want to buy another primary, you would need to wait 12 months like Zach said. The only downside is you would be paying interest on the money you pull out while you wait to buy & reinvest that capital)

2) Pull Cash out of your current home as an investment property, and then go buy a primary residence. (the interest rate for pulling cash out as an investment property would be much higher than a primary, so this may not be your best option)

3) Take a HELOC out on your primary residence up to 80% CLTV and purchase another property - This option allows you the flexibility to purchase now or later on your timeline without paying interest on the money until you are ready to use it.

Please do not hesitate to send me a message here on BP if you have further questions about strategizing for your next purchase. I am glad to help!

Ibrahim Yamini · Answer

@Zach Wain

Thank you!

That’s why I love this website, it helps newcomers gain insight from others who went through these endeavors before, guiding them with critical information before jumping right in.  All of your feedback has helped me a lot and now I have a better understanding of how I’m going to move forward.

Zach Wain · Answer

@Jason Howell - correct.  80% loan to value on a new first mortgage.  Assuming the value is $367,000 means a new loan size of $293,600.  This new loan will pay off the existing mortgage of $218,000, so $75,600 cash back to you minus any closing costs.

@Ibrahim Yamini - Use $70k-$75k as the cash out number but the rest of your plans are accurate.  I would also consider going with a low closing cost loan and taking a higher rate rather than paying high closing costs for a very low rate because it sounds like its 50/50 if you will stay in your home for a long time.  If you save your VA loan benefits for a future primary home purchase that is great, but if you dont move for a very long time you may consider refinancing into this mortgage again in the future.  Low closing costs is better for the vast majority of borrowers.

Ibrahim Yamini · Answer

@Grant Schroeder @Zach Wain

Thank both so much for your input.  I thought a conventional loan sounded better, but I'm confused where you got your numbers from.  If I took 80% out of my current home, it should be $119K, unless I missed something.

V = $367K

O = $218K

E 80% = $119K

I don't completely understand how all this works, but I've been educating myself for over a year and will be taking action as soon as I return home.

Keep in mind that I have no interest in moving out of my current house.  My entire family is there and it just seems like more hassle than it's worth at the moment.

Please let me know if I'm understanding this correctly.  I do a home equity loan and take out $119K and replace my current mortgage with a new one.  The $119K is mine to keep, because everything else is being paid back by the terms of the new mortgage.

Now, I can use the $119K to buy an investment property or two if I so choose.

The bank will have to approve me for another loan, for a $250K house, but since I have the $119K, I can easily pay 20% for a down payment, closing costs, hire a property manager to get a tenant and still have a decent amount of capital left over for other fees.

Then wait a year and buy 2 more houses with the Liquid and equity I've acquired.  I'm aware that banks will stop loaning you money for houses after a certain period, so I'll have to find private lenders after my 3rd or 4th house.  Also, I'm just looking at "Move in Ready" houses at the moment.  I have no interest in rehabs.

Can someone let me know if I missed a step?

Ibrahim Yamini · Answer

@Lynn McGeein  Thank you for your response!  You're right, I didn't calculate the interest for the mortgage payments in the other house.  But yes, the 20% down will come from the $134K I would be able to take out of my house.  The $18K will also come from the $134K and will act as a security blanket.

I'm in Phoenix and a lot of California folks are moving here, so I think you're right about vacancy.

My focus is this though; do you think I'm better off using my Home equity to invest in another property, or using the VA loan with no money down?

I personally think the option without the VA loan is more viable because it involves actual cash, but I wanted another opinion

Lynn McGeein · Answer

I'm a bit confused but admit I haven't had coffee yet this morning.  Are you not calculating the payments involved in both the cash-out refi or the loan you'll get using it for the 20% down?  When you say you'll have a mortgage of $1500 month so that's $18K going into the house in a year, much of that $1500 month is interest paid to the lender, with a much smaller portion paying down the home's equity, and you'll be paying back the cash-out refi as well, adding to the monthly cost of your original home.  Also, I don't think you're factoring in that you'd still likely have to qualify for both house payments and the cash-out refi loan payment, regardless, so best to discuss with your lender which scenario works best for you.  As far as vacancy, I don't think vacancy is an issue as there are so few rentals available, unless you're in an area people are moving from, in which case, buying investment property there would not be a good move, in any case.

Use my VA loan or current Equity to buy an investment property?

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