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.

We’ll start with a brief explanation of what VA loans are and their benefits.

VA Loan Overview

The VA loan program, administered by the Department of Veterans Affairs, provides eligible veterans and service members with significant advantages for homeownership:

• No down payment: The VA loan allows you to purchase a home without any down payment, unlike conventional mortgages that typically require 20% down.
• No personal mortgage insurance (PMI): VA borrowers don’t pay private mortgage insurance, saving hundreds to thousands of dollars annually compared to conventional loans with less than 20% down.
• Low-interest: Because the VA guarantees a portion of these loans, lenders offer more competitive rates than conventional mortgages.
• Access to streamline refinancing: The VA’s IRRRL program provides an efficient way for current VA loan holders to reduce their interest rates.

VA Loan Occupancy Requirement

While the VA loan offers significant benefits, it’s important to understand that the Department of Veterans Affairs intends this product to increase homeownership, not investment property portfolios.

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

This requirement prevents borrowers from using the VA loan to purchase a pure rental property. However, options exist to generate income with a VA loan property, which we’ll discuss in the next sections.

What Is House Hacking?

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 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.

VA Loan House Hacking

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.

• Option 1 – Single-family home with roommates: This works best for young, single veterans. Purchase a three- or four-bedroom house with your VA loan, occupy the bedrooms you need, and rent out the extras to roommates who share common spaces. For example, with a $1,000/month mortgage, renting two bedrooms at $500 each would cover your entire housing cost.
• Option 2 – The “plex” approach: This option suits veterans with families or those who prefer more privacy. The VA allows you to purchase duplexes, triplexes, or quadplexes, provided you occupy at least one unit. You’ll need to demonstrate sufficient debt-to-income ratio to qualify, but with proper analysis, your tenants’ rent can cover your mortgage and potentially generate additional cash flow.

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.