Investing in Property

20 Steps to Purchasing a Rental Unit Using a VA Loan

1. Find homes within the desired area with Veterans Home Loan options, closing cost credits, and perks if a preferred lender of the property is available.

2. Try to buy down the annual interest rate, especially if there is no requirement for down payment through VA (veterans affairs) preference. Use APR (annual percentage rate) decrease calculations with buy down options (% of total cost = point of buy down). Also, there are possible lender credits if 0 or more points are purchased.

3. Determine the neighborhood/community connectivity, appropriate drive time to area bases, attractiveness, reasonable structural and interior quality, estimated annual maintenance cost (1% goal), known contractors for repairs in the area, rentability during future tour duty assignments; preferably that another military member’s BAH (basic allowance for housing) could cover OR the salary of renters with a similar lifestyle, career and/or educational choices in the DC metro area.

4. Budget to pay a buy-out-fee, and research the procedures and addendum to contract if currently renting an apartment or another property. It is important to know the options if a lease is being broken before relocating to owned property due to the penalty payments that may be expected or required. Thankfully, if there is enough notice (possibly 60 days) or a Military Clause, there will be no additional payments for moving-out before the end of the lease term.

5. Out of pocket costs could include: down payment, closing cost, origination fee, processing of settlement and title, pre-paids (principal interest rate per lender, appraisal, credit report, tax service, funding fee, principal taxes, property taxes, county taxes, and insurance). Depending on the bank, the amount due at the final settlement/walkthrough may need to be wired a week in advance in order to be available after the possible transfer leeway time. There may be a third party collector associated with the bank to allow immediate wire transfers and an expediting fee may be applied.

6. Many of these items are a part of the escrow, also called an “impound” or “trust” account, which is money held in a 3rd party account to protect both the seller and the buyer until the contract is negotiated, the deal is closed, and the deed is recorded. Escrow accounts are also used for taxes during the life of the mortgage. When the bank is paid the monthly mortgage amount, some of the money has to go to the state towards taxes.

7. Negotiation! Hire an agent (buyers agent) to be paid by the seller (along with the seller’s agent) with the overhead cost included in the asking price of the home OR do research of similar sales (comps aka comparable sales), and unit prices that the seller may agree to use to attain owners/mortgage holders. Do not solely trust the sales agent because they are trying to make a short term sale for their immediate profit, not long term savings for the future homeowners. For many properties, especially older single-family homes, real estate agents should be brought into the process before the contract is signed to advise on issues and even find better options for “loan shopping” or “service shopping.”

8. Not all condos are sold with agents & the seller calculates an average value among units of similar type to be factored into the listing price. Typically, there is an appraiser and inspector on the seller’s side (especially if this is new construction), and the buyer can also hire an appraiser and inspector to represent them and add anything required to the punch-list before closing.

9. Determine the monthly mortgage and what renters could be charged to “break even” with the mortgage rate. Can any perks be added to the unit so that breaking even or profit is more realistic? (furnishing the unit, utilities paid for, access to amenities, multiple parking spaces, etc.)

10. Expect to research, read, fill-out or provide these documents:

1. Homeowners insurance

2. Military Statement of services

3. Military VA Indebtedness letter

4. Loan option lender credits, monthly payments, closing cost, prepaid, APR, totals

5. 4506-Ts

6. Final loan costs: estimated closing, prepaids, terms and monthly payment

7. Notice to borrowers

8. Three years of separate and joint tax returns (if multiple buyers on the title)

9. Three years of W-2s

10. Appraisal report

11. Pre-qualification

12. Pre-approval

13. 1st time home buyers credit

14. Appraisal by other besides the property manager (not necessary for new construction)

15. Parking addendum

16. Ratified contract

17. Notice of home inspections and closing

18. State tax credit verification (buyers affidavit)

19. Mortgage loan disclosure

20. Home owners association disclosure statement (HOA payment account)

21. Sales agreement

22. Public offering statement

23. Amendatory clause

11. Re-work the monthly budget using 1 salary, 1 mortgage and 1 rental using BAH (plus additional funding) in another area or any other worst case scenarios that could occur during investment.

12. Verify school districts using Great Schools, the public school system web site, and specific master plan zoning/boundary/feeder information (even if children are not a personal factor since renters could be more interested depending on educational factors.) Determine the closest private and public schools.

13. How much money could be spent on children (as homeowners who wish to start a family) in addition to paying for the property long term in the worst case scenario?

14. If retrofitting existing construction, think about long term cost savings concerning insulation including: Cellulose insulation (recycled newspaper) treated with fire retardant as insulator if possible for least flame spread and smoke properties OR Air-Crete OR amino-plast aka formaldehyde foam OR thermal barrier intumescent coating on top of spray foam OR rock wool aka mineral wool (as opposed to fiberglass batt with paper, blown fiberglass insulation, XPS extruded poly-styrene, EPS foam beads that melts OR spray foam), 2 lb closed cell/open cell OR 1/2 lb foam/ther-max foam poly-iso with radiant barrier foils on either side (even though this does melt, it extinguishes itself and produces more black smoke than flame spread if there is no flame able to reach this), OR FSK paper with brown paper backing (though applied on top of spray foam is an ignition barrier rather than a thermal barrier and the smoke produced is more prevalent than in other types of insulation.)

15. Sell locally, donate, or trash unwanted furniture, clothing and other household items (especially paper.)

16. If financing for furniture is not desirable, checks can be pre-dated for desired items to be shipped to the warehouse without altering the debt-too-income ratio too heavily while loan officers are monitoring the future home-owners’ accounts. Immediately before delivery, the final desired payment methods can be utilized, so switching to or between credit/debit/cash after home purchase closing/settling is possible when precise credit management isn’t as permanent of an issue. Also, protection packages for furniture cleaning, repair and replacement are a good idea.

17. Showroom furniture prices may be high and more expensive than online prices (same pieces, same warehouse and distributor.) The price difference is justified with the customer service, warranty, replacement, repair, delivery, and assembly provided in-store that may not be available online. Be willing to negotiate and utilize price-matching from other sources to get the best deals (seasonal holiday sales.)

18. Strategize renting the property, and figuring out the rental trends in the area though military programs and private programs. Market independently or through real estate agents (staging photos, online real estate profiles, and property showing.)

19. Find a contractor through HomeAdvisor or other sources (such as a full service property management company.)

20. Select a full service property management & real estate company to collect monies, perform background checks, place lock boxes, carry out possible evictions concerning renters and prepare the property between leasehold agreements. The selected company should understand the owner’s specific lifestyle that will encompass many moves at varying distances from the property if a career and income is military dependent.