A low-cost home loan backed by the U.S. Department of Veterans Affairs — also called a VA home loan — is more than just a way for veterans to afford homes. The loans can also be used to help veterans buy rental homes that they can make some extra money from as landlords.
In VA loan rule provisions that aren’t widely known, veterans, active-duty personnel and their surviving spouses can buy investment homes with no money down and low mortgage rates. The main requirement is that they must live in the home as a landlord.
“It’s a great way for them to subsidize their housing,” says Elysia Stobbe, branch manager at NFM Lending in Jacksonville, Fla., who has written a book about how to get a mortgage.
While not common, more VA loan applicants are buying rental property than the general population. Nine percent of U.S. homeowners have investment homes, while 16 percent of active duty members of the military do, according to a 2016 study by the National Association of Realtors.
Rental property requirements
After the main requirement that the service member live on the property, there are a few other conditions when using a VA loan to buy rental property.
It can be as big as four units, or can be a duplex or triplex. Or it can be a home where a room is rented out, or a home with an apartment on the property.
The owner must live in the home for at least one year. After that they can rent out the entire home and live elsewhere.
They could also buy another rental property and live there for a year before buying another rental property, Stobbe says. But they can only get so many VA loans, up to an amount of veteran benefits called an “entitlement” that can be split over multiple properties, she says.
Each time a home is bought with a VA loan, the VA insures 25 percent of the purchase and that amount is subtracted from the entitlement.
For most areas of the country, the maximum financing through a VA loan is $424,100, Stobbe says.
Like all VA home loans, the home must be in move-in condition and approved by a VA home appraiser.
Rental property as income
Becoming a landlord can essentially make qualifying for a VA loan easier. A borrower can use rents from the other units in a multi-unit property to help them qualify for a loan by counting the rent toward income, says Brian Davis, a real estate investor who teaches about rental investing at SnapLandlord.com.
“Typically they can add 75 percent of the market rents toward their qualifying income,” he says.
The home appraisal can include the market rents in the area, and a borrower doesn’t have to always show that they have tenants ready to move in, Stobbe says.
“It’s best to show you have a tenant signed up, but it’s not always necessary,” she says.
Ready to be a landlord?
One of the biggest questions a veteran may have about buying rental property is if they’re prepared to be an onsite landlord.
“Veterans can best prepare for becoming a landlord by thinking of their rental property as a business,” Davis says.
“They’ll need to screen all rental applicants equally, running credit reports and background checks on each, and choosing the best candidate,” he says. “They’ll need to serve late notices if the renter fails to pay on time, and file in court for eviction. They’ll need to be responsive to make repairs when something breaks.
“It’s a business, and anyone who’s not prepared to treat it as such should not become a landlord.”
Living in the same building as your renters “requires a certain compartmentalization of your relationships with your renters,” Davis says. It requires having a professional and personal relationship at the same time, and can include doing favors for each other and being respectful of noise while requiring payment on time.
Landlords should set aside cash for repairs, vacancies, rent defaults and other costs, Davis suggests. Ideally they should have one to three months of rents set aside for each unit, he says.
What if you have to move?
VA home loans are meant for buying primary residences, and aren’t intended to buy vacation or rental homes. That’s why the VA requires the borrower to use it as their primary residence.
Transfers, however, are common in the military. The main reason active-service military members buy a home is job relocation, at 33 percent, according to the National Association of Realtors.
A VA loan borrower can then either sell the home or can rent it out — which may be easier by hiring rental management company.
Another option is to have a new buyer take over the loan. VA loans are assumable by a new buyer or family member if the borrower wanted to move out or sell the property, Davis says. Most conventional mortgages aren’t assumable, he says.