House Hacking with the VA Home Loan

Military and veteran real estate investors frequently ask if it’s possible to use the house hacking strategy with the VA home loan. Yes, it absolutely is, and in this article, we’ll cover how eligible borrowers can use their VA home loan benefits to house hack.

Specifically, we’ll cover the following topics:

• VA Loan Overview
• VA Loan Occupancy Requirement
• House Hacking, Defined
• House Hacking with the VA Loan
• Additional House Hacking Considerations
• Final Thoughts

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VA Loan Overview

What we now know as the VA loan has its origins in the 1944 Servicemen’s Readjustment Act. In addition to providing education and training benefits for returning World War II veterans, this bill granted troops an accessible and affordable path to homeownership.

Currently administered by the Department of Veterans Affairs, the VA loan provides eligible borrowers the following key benefits:

• No down payment: Whereas most conventional mortgages require a 20% down payment, the VA loan does not have this requirement, making home buying far more affordable.
• No personal mortgage insurance, or PMI: Related to the above, when borrowers put down less than 20% on a property, they typically must pay PMI until they reach 20% equity in the home. By not needing to make these payments, VA loan borrowers save hundreds to thousands of dollars every year.
• Low-interest: Due to the fact that the Department of Veterans Affairs guarantees a portion of VA loans, lenders assume less risk issuing them. As such, VA loans generally come with lower interest rates than conventional mortgages.
• Access to the VA’s IRRRL program: If you have a current VA-backed loan, the Department of Veterans Affairs offers its Interest Rate Reduction Refinance Loan, or “streamline” refinance, providing borrowers an efficient means of reducing their interest rates.

VA Loan Occupancy Requirement

Having outlined the above major benefits to the VA loan, it’s clear why military and veteran real estate investors would want to use the product for investment properties. However, the Department of Veterans Affairs intends for this product to be used to increase homeownership, not investment property portfolios.

In line with this homeownership goal, VA loans come with an occupancy requirement that veterans must understand prior to considering investment opportunities. While some exceptions exist, VA loan borrowers must occupy their home as a primary residence within 60 days of closing. Additionally, though no hard and fast rule exists, most lenders require that borrowers then live in the home as a primary residence for at least one year.

While this requirement prevents borrowers from using the VA loan to purchase a pure rental property, options exist to generate income with a VA loan property, and we’ll discuss one such option in the next couple sections.

House Hacking, Defined

If you follow real estate investing websites or podcasts, you’ve likely heard the term “house hacking.” Put simply, house hacking means having tenants pay your mortgage while you live in that house, too.

For example, if you own a duplex and wanted to pursue a house hacking strategy, you could live in one of the two units while renting out the other. If properly analyzed, house hacking deals will allow you to live in a place for free (and potentially generate some additional cash flow). In other words, if your mortgage and associated expenses on this duplex were $1,500 per month and you rented the second unit out for $1,500 while living in the first unit, you’d be a successful house hacker.

However, veterans should recognize that this isn’t an all-or-nothing strategy. Even if you rented that second unit for $1,000, you’re still coming out ahead, as a tenant would be subsidizing two thirds of your property expenses.

House Hacking with the VA Loan

Having defined house hacking, the question becomes, how can you pursue this strategy with a VA loan? Investors have two options, depending on their unique circumstances.

• VA loan house hacking, option 1 – single-family home with roommates: This option probably only makes sense for young and single veterans, but it is an option. Say you only personally need a two-bedroom home.  Instead, you purchase a three- or four-bedroom house with your VA loan. Then, you move into the one or two bedrooms you need, rent out the other two, and share the common spaces with your roommates. In a basic example, if you have a $1,000/month mortgage and rent each extra bedroom for $500/month, you live there for free, as tenant rent payments cover your mortgage.
• VA loan house hacking, option 2 – the “plex” approach: This is a better approach for veterans with families – or who just like their privacy too much to have a roommate. While not common, the VA actually allows borrowers to use the VA home loan to purchase duplexes, triplexes, or quadplexes, so long as the veteran occupies at least one of the units.  While veterans will still need to demonstrate a high enough debt-to-income (DTI) ratio to qualify for the loan, this strategy does work.  And, as with the single-family home approach, a well-analyzed deal will ensure that your tenants’ rent payments cover your mortgage (and potentially more).

Additional House Hacking Considerations

What makes house hacking such an outstanding strategy for new real estate investors also has an inherent drawback, that is, you’re living in close proximity to your tenants. This means that, if you have a disagreement with a tenant, that disagreement will linger immediately next door to your home.

For some veterans, this reality isn’t a problem, as they can effectively compartmentalize personal and professional lives. However, before pursuing a house hacking strategy, veterans should honestly consider whether they’re suited for the additional stress of A) acting as a landlord, and B) having tenants either living in your home or next to your home.

Final Thoughts

Saving for an investment property down payment typically represents the primary obstacle for new real estate investors. As such, pursuing a house hacking strategy with the VA loan provides veterans and military members an outstanding option to invest in real estate while still taking advantage of the no-down payment benefit of the VA loan program.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.