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Oregon VA Home Loan

Making Money With Your VA Home Loan

August 28, 2018

by Colin Marcum

In this article, we discuss a technique in which you can use the VA Home Loan Program in order to acquire a property that actually has the potential to make money for you. It will require a little research on your part, but we will discuss current loan limits for the program, how to determine whether a property has positive or negative cash flow potential (i.e. makes or loses money), how to acquire that potential property, and how to turn it into a passive money making machine that requires little action from you.

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The key element of the VA Home Loan Program that makes this work is that the program doesn’t only guarantee loans for single family residences (SFR), but also multifamily residences (MFR) up to a quadplex; a property comprised of four separate units or apartments. Since one of the stipulations of the program is that this property is your primary residence, you must live in one of the units while renting the other three out. This provides you the opportunity to work the numbers to your benefit so that by renting out these additional units you can cover the costs of acquiring and maintaining the property, and have additional income left over. This can still work with either a duplex (2 units) or a triplex (3 units), but I have generally noticed it is easier to find and make a quadplex into positive cash flow property. To emphasize, it is all based on working the numbers so if the opportunity arises and your numbers are accurate, don’t hesitate.


NOTE: The VA Home Loan Program doesn’t support investment properties, only a property you will occupy, hence the reason you must make it your home. You, on the other hand, can treat it as both. Making it your home, but acquiring it as if it were an investment property by negotiating the price in order to reduce the mortgage and therefore reduce the costs.

ONE

For 2018, the VA home loan limits are based on the Federal Housing Finance Agency's (FHFA) loan limits which can be found here.


For the State of Oregon, loan limits are the same statewide, and these are the current VA Home Loan limits for Oregon for 2018.


ONE-UNIT LIMIT: $453,100


TWO-UNIT LIMIT: $580,150


THREE-UNIT LIMIT: $701,250


FOUR-UNIT LIMIT: $871,450

Quadplex VA Home Loan

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If you ever get into real estate investment, there will be an acronym in which you will become quite familiar.  PITI:


Principal

Interest

Taxes

Insurance


PITI is related to mortgages, and encompasses the monthly payments required to satisfy the contract and not default. Each month you will pay off interest and pay down the principal for the duration of the mortgage; e.g. 15-years or 30-years. Property taxes , usually paid in your monthly payments are collected yearly, and are based on an appraisal of the property by the tax assessor. The State of Oregon has an option to pay it all at once for a discount or into three separate payments, but for most mortgages you will pay property taxes on a monthly basis directly to the lender alongside the principal and interest payments, and they pay the yearly lump sum from your account. Lastly, home owner, liability and mortgage insurance payments may also be rolled up within the mortgage payment, or done separately, based on the lender’s preference. Regardless of whether everything is rolled into an individual monthly “mortgage payment” or you pay taxes and insurance separate, these represent the costs associated with acquiring the property. We will have an example of how to determine PITI later in the article.


NOTE: Oregon Veterans with a 40% Disability Rating or more from the VA may file to have their property taxes to be exempted, which in turn will reduce your PITI payments. If this applies to you then please refer to this exemption notice from Oregon Department of Revenue to see how you can file.


The next element you need to calculate is the rental income you can expect for the units of that property based on comparables within the market. A comparable is simply a similar property that is currently rented out within that neighborhood in order to draw a comparison.


For example, each unit in your quadplex has two bedrooms, one bathroom, a kitchenette, an individual one car garage in an adjacent structure, and individual door access. You check, or better yet have a Realtor or Property Manager check for you, numerous apartments in the immediate area to determine what the current market rate for a similar unit is going for. They need to be nearby, less than a mile if possible, since nearby amenities, services, and attractions play a big part in the value of a property; including rentals. Let’s just say the going rate for a comparable unit is approximately $1,000.


When it comes to rentals there will be two other variables you will need to take into account when determining its cash flow.


The first is the vacancy rate since you need to plan for times in which you may not have a tenant occupying one of your units. The vacancy rate that most investors utilize is 8% of the rental price. This as a fraction is about 1/12th or one month of a year of twelve months in which the unit will be unoccupied and not earning you income. That lost month covers the time the unit is vacated, put on the market, refurbished, and occupied by a new tenant.


$1,000 (Rental Price) X 8% (Vacancy Rate) = $80 vacancy rate per month


The second is the Property Manager fee if you decide to utilize one to manage tenants and care for the property. While property manager fees vary from firm to firm, the standard rate investors use to calculate is approximately 10% of the rental price. You can save money by handling tenants and repairs yourself, but the value of a Property Manager is the freedom it provides you from having to handle all that yourself. You won’t have to deal with problem tenants, marketing units for rent, late night work orders and they understand the fair market value of a property as the economy shifts. Additionally, they may be able to secure discounts with certain established contractors for repairs and renovations that you may not be able to secure since you are new to the market.


$1,000 (Rental Price) X 10% (Property Manager fee) = $100 fee per month


Taking that rental price and subtracting both the vacancy rate and the Property Manager’s fee will provide you the assessed monthly revenue generated by each unit for each month of a year. Take note that when you calculate everything you don’t include the income from the unit that you occupy, only the others, but do include that additional manager’s fee if you wish to utilize their services for repairs to your own unit. As a result, the income for the example should look like this:


$1,000 - $80 - $100 = $820 per unit

$820 X 3 units = $2460 per month rental income

$2,460 - $100 (additional manager fee) = $2,360 monthly revenue


Note: You may choose to have a small percentage separated from your monthly revenue in order to have a slush fund to help with emergency repairs and maintenance, but homeowner’s and landlord’s insurance can help compensate for destructive and negligent tenants.


Since PITI payments are monthly, and rental income is monthly, if the income is greater than the PITI then you have a positive monthly cash flow; simple, yes! The real difficult step is finding the property and negotiating a good price. There are numerous avenues for identifying potential properties, but one key element is finding one whose owner is distressed. While the method for identifying such an owner warrants its own article, the basic premise is that the owner is in dire straits for one reason or another, and is desperate to part with their property as soon as possible. This means they would be willing to accept an offer at a lower price in order to be rid of the property and get cash in hand. It won’t necessarily be easy to find such a property and owner, but they do exist and you have all the time in the world to use your VA Home Loan Program benefit, so there isn’t necessarily a rush.

Oregon VA Home Loan Mortgage

$300,000 Purchase Offer

Continuing with the previous example, say you assess that the fair market value of the property is at around $300,000. Using a simple PITI calculator we can determine approximately what our PITI payments will be. If we offer to purchase the property at its fair market value of $300,000, using a 30-year loan with a 4.74% interest (an average rate for VA loans) with annual property taxes of $9,200 and insurance package of $4,000 annually, then we can see that our PITI payment will be at around $2,663 per month. Since we determined our monthly revenue to be around $2,360 the difference ends up being around -$273.


It isn’t enough provide you a positive cash flow, but you can see that if you weren’t occupying one of the units then the rent from all four would push this property into a positive cash flow asset; specifically +$617 per month for all four units if you were curious.

Oregon VA Home Loan Mortgage

$200,000 Purchase Offer

But again, the key to carrying on is that we are seeking to purchase the property at a discount. If they are desperate to get the property off their hands, we can instead make an initial offer that is much lower to see if they are interested. In the following situation we calculate for an offer that is $200,000, a full 1/3rd below fair market value. In this calculation we now see the PITI payment dropping down to about $2,142 per month, which will provide you a positive cash flow of +$218 even when you are occupying one of the units; which in turn would have had a positive cash flow of +$1,038 if you were able to rent out all four units.

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You can offer lower amounts, you can negotiate prices back and forth, but in the end ensure that the numbers dictate your decision. The development of good offer is worth its own article, and includes a reducing offer prices based on current operating revenues and deferred maintenance that you would later have to pay for to bring it up to market standard. If the numbers don’t work and the owner won’t budge then politely part ways, and look for the next opportunity. You have time, and there is no need to squander it. But before you go I want to leave you with one more thought…


This process can help you potentially utilize your VA Home Loan benefits in order to acquire a property that is both a residence for you as well as a semi-investment property. However, you may be wondering if you have to always reside within the property, and if there is a way in which you can eventually move out and rent out all of its units. Under your VA Home Loan the short answer would be “NO,” however, there is a way around this and the VA itself provides you the tool for doing so.  If by chance you need to move to a new location, or find another you would like to reside, you may prefer to retain your fourplex for its passive income potential and rent out that final unit.  To do this, without having to sell the property, you simply need to work with another lender in order to take out a new mortgage on that fourplex.  By treating it as an investment property the income value can be used to secure a reduced monthly PITI payment, and pay off the existing VA Home Loan.  This means that you can utilize the VA Home Loan again to secure a new property.


If you plan on continuing to live on the properyt you can always reduce the existing mortage by refinancing that mortgage under better terms.  That tool is called the Interest Rate Reduction Refinance Loan (IRRRL), and it is a VA program that allows you to refinance the VA mortgage through another VA approved lender.  Check out our article about the IRRRL here.



-Colin Marcum, Sundance Realty



Additional Sources



Oregon Department of Veteran Affairs: Benefits and Programs

Oregon Department of Revenue: Disabled Veteran or Surviving Spouse Property Tax Exemption

U.S. Department of Veteran Affairs:  VA Home Loan Limits

U.S. Department of Veteran Affairs: Interest Rate Reduction Refinance Loan

Sundance Realty: Mortgage (PITI) Calculator