Active duty members of the military and those qualifying for veteran’s benefits have several advantages over the typical investor when it comes to growing wealth in rental real estate. These advantages include better loan terms, less expensive insurance, reduced costs for maintenance and repairs, and better leasing and property management options. As a Navy veteran, I have quite a few investing regrets as I look back on my 26 years on active duty as a submarine officer – I knew of very few of these advantages until the very end, and made little use of those with which I was aware. If you are still on active duty, or are a younger veteran than I am, learn from my mistakes and don’t wait to put these powerful tools to use to grow your wealth.
The most powerful tool they have is access to the use of other people’s money for funding their investments, the VA loan and a borrowed down payment from a life insurance company. Having an insurance company fund the down payment on an investment property requires being healthy enough to qualify for a high cash value policy, something with which few military members or veterans struggle. While the VA loan is only available for a primary residence, it can be used repeatedly and on multiple homes at once. Many military members take advantage of this exceptional loan by using it to purchase a residence at a duty station and then retaining the property as a rental as they move to their next assignment. But, many don’t realize they can use the VA loan again while retaining it on the original property.
The VA makes the calculation a little more complex than this, but to simplify, if you have not used your full loan limit which in 2017 is $424,100 ($636,150 in certain high cost counties) on the current VA loan, you can still use the VA loan to purchase the new home you will live in. For example: Your first home (now a rental) cost $200K. Now you are buying a $324K home – that is a total of $524K, $100K above the VA limit. You would have to contribute 25% of the $100K, or $25K. This remains an excellent opportunity. You get the new loan with less of 8% down, better interest rates, lower credit score thresholds and no mortgage insurance premiums (a huge advantage).
There are several additional misunderstandings that often cause eligible individuals to not pursue a VA loan, such as “The VA Funding Fee is too expensive.” In most cases, this funding fee will be considerably less than what you pay in mortgage insurance for a primary residence or higher interest rates for an investment property. For first-time buyers, the fee is 2.15 percent if no money down (3.3% after your first use), and reduces for down payments of 5% and again if more than 10% is put down. Two very important notes: First, funding fees for loans below the VA limit can be financed, retaining a truly no money down scenario, and second, for veterans with at least 10% service-related disability, the funding fee is waived.
Veterans and active duty military investors have several unique tools for saving money when it comes to maintaining and operating their properties as well. They have access to less expensive property and casualty insurance from USAA while their portfolio remains small, generally less than 4 properties, and they can receive valuable discounts on maintenance and repair items from home improvement stores like Home Depot and Lowes. These investors often choose to self-lease and self-manage their properties, tasks made easier by military community housing websites and marketing resources at housing offices on military bases.
Growing wealth through investments in rental real estate is an incredible opportunity for veterans and members of the military. If you qualify for these benefits and would like to find out more about how you can use them to grow your assets, please reach out to your Wealth Strategist here at Paradigm Life.