Can you use a VA home loan to buy investment properties? The short answer is no… and yes.
The VA stipulates that the VA home loans are intended solely for residential properties and excludes investment properties. The VA defines investment properties as “a property that the owner does not occupy as a primary residence or second home, regardless of whether the property generates income for the borrower.” In other words, in order to use the VA home loan option, the borrower must live in the property.
However, the VA rules also leave a loophole for people who want to purchase investment properties.
Investment Property Loophole
Essentially, the VA rules say “A residential property may not consist of more than four family units and one business unit except in the case of certain joint loans.”
This means that you can get a loan from a company that offers low VA rates and purchase a multi-family home with up to four units and a storefront.
You could live in one of the units, and earn income by renting out the remaining three. If you use the VA loan to purchase a multi-unit building with a storefront, you can also rent out the store front, or use it to run your own business.
The thing to remember is that you must live on-site, and take occupancy within 60 days of closing, to meet the VA’s requirements for the loan. There are some exceptions to the 60-day rule, such as if the building is under construction or renovation, and you are awaiting completion,
After you have lived in the property for a while, there are steps you can take to move out and make it solely an investment property.
From Residence to Investment
VA home loans don’t have caps, but each veteran has a certain amount that he is qualified to borrow without making a down payment. The average entitlement is $36,000, but some lenders will loan up to four times that amount, without requiring a down payment, if you meet the bank’s credit and income requirements.
If you don’t use up all of your entitlement on one property, you could use the remainder to get a no-money-down VA loan on a second property, such as a single-family home, or another multi-family property.
The VA also has a program called the Interest Rate Reduction Refinance Loan (IRRRL). This program allows you to refinance a property previously purchased with a VA loan, to get a lower interest rate. The IRRL also has slightly different residence stipulations – you don’t have to live on-site, you just have to prove that you had previously occupied the property. This means that you can refinance the property with an IRRRL and then move out and rent that fourth unit.
How to Make it Work
- Purchase Property A – a four-unit home – with a VA loan.
- Rent out three of the units and live in one to satisfy the VA loan occupancy requirements.
- After a year, find determine your eligibility for an IRRRL. If eligible, take out an IRRRL on your Property A and continue living in the property.
- Start the process of getting approval for a second VA loan. Keep in mind that the entitlement you receive is the amount you can borrow with no money down. You could still qualify for a VA loan, with a small down payment even if you have used up your entitlement.
- When you are approved, start the search for Property B. You can use your VA loan to purchase an existing property, or build a new one. You can also use the VA loan to purchase another multi-family property.
- Purchase the new property and assume occupancy within 60 days of closing, unless you meet certain exceptions. If it’s a multi-family property, rent out the remaining unoccupied units.
- Turn rent out the remaining unit in Property A, making it a 100-percent an investment property.
If you decide to make Property B another owner-occupied rental property, you could use the equity in both properties to purchase a third investment property – either by getting another IRRL on Property B and trying the VA loan process again, or using some other form of financing.