The vast majority of millionaires and billionaires got there by owning real estate. Investing in real estate is just a smart thing to do. So let’s look at the story of Malcolm Lawson, a veteran who’s now a real estate agent based in Maryland, and how he purchased his first rental property with zero down using a VA loan.
Before Buying a Rental Property, Make Sure The Numbers Make Sense
When Malcolm was 25, he purchased his first property using a VA loan, and it was his primary residence at the time. Before he purchased the home, he made sure to look at the rental rates in that area to get an idea of what he could rent it for, and made that the rental rate was higher than the mortgage payment is.
It’s important to remember that not all properties make good investment properties.
There are plenty of properties that you’re going to pay a premium for, such as new construction, or specific areas with specific amenities. Sometimes the numbers just don’t add up to make it a rental property. If the rent that you would actually get from it is less than what your monthly mortgage payment is, then it’s not a good rental property.
That’s the first step in this whole process, before you ever buy your first house, find a property that you’re rental estimate is higher than what your monthly mortgage payment is going to be.
Malcolm found a townhouse that was close to a couple of schools with easy commuting distance to various locations. He purchased it as his primary residence with zero down using a VA loan and wrapped all his closing costs into the mortgage as well. So he really got into this property with no money down,
Prior to owning the home, Malcolm was renting out an apartment for $1,700 a month. He purchased the house, which was twice the size of the apartment, and his monthly mortgage payment was only $1,500 a month. So it was absolutely a smart plan for him to do this, right from the get-go.
Moving Out Of Your Primary Residence and Renting It Out
Malcolm then lived in this house for about two years and did a lot of renovations. He put in about $20,000 worth of upgrades and did all the work himself. He then started having conversations with his lender, and at that time he was still in the Military, so he moved out of the house onto base housing.
He then rented out his previous primary residence. His VA loan lender required that he have six months of rental income on that property before they would count that rental income against that mortgage and qualify Malcolm for a new home loan.
Because of the renovations he did and the location, he was able to get $1,900 a month for this property, which was a gross profit of about $400 a month of income he was making off the property.
Different Ways To Make Profits Off Of Rental Properties
There are three main ways you make a profit off of a rental property.
- Cash Flow: That’s the difference between how much you’re putting in for your monthly mortgage payment and how much you’re rent is. In Malcolm’s case, he getting about $400 gross cash flow each month.
- Appreciation: Real estate goes up in value about three percent every single year. That’s the national average over the last 100 years.
- Debt Paydown: By collecting rent and applying portions of it to your mortgage, your tenants are effectively paying down your mortgage on your behalf.
Purchasing More Than One Property Using a VA Loan
Something most people don’t know is that you can absolutely purchase more than one property using a VA loan and still pay zero down.
How it works is that there is something known as the VA Entitlement. This is essentially the maximum loan amount that you can get using a VA loan. Now, the standard VA entitlement is a little over $400,000 dollars for the United States. However, there are certain counties that have a higher cost of living where the entitlement is higher.
Malcolm purchased his house for $210,000 in Anne Arundel County, where his VA entitlement was $500,000. That meant he had $290,000 dollars remaining in VA entitlement.
He then purchased a second home for about $240,000 dollars. So he now owns a $210,000 rental property that’s paying him $400 a month in cash flow, and he owns a $240,000 primary residence. Both of which he paid zero down for, and was pretty much just able to move right in.
As an added bonus, both his properties are also appreciating in value, and both properties are also having their mortgage debt paid down by renters.
This is one of the simplest ways to invest in real estate using a VA loan. Buy a primary residence, but before you buy it, make sure that it’s going to rent for more than your mortgage payment. Move out and rent it. It was that simple for Malcolm.
In case you’re interested, here’s a video where Malcolm discusses his story.