While not often discussed, veterans can use their VA loan benefits to purchase a mixed-use property. In this article, we’ll cover how veterans and current service members can buy a multi-unit property with existing commercial space or could include both commercial and residential units.
Specifically, we’ll cover the following topics related to the VA loan and mixed-use properties:
The VA loan is an incredible program that provides veterans and active duty service members with a competitive mortgage option. With no down payment required and limits that often exceed conforming loan amounts, it has helped countless military families purchase homes over the years.
However, when it comes to using a VA loan for commercial property, things get a bit more complicated The VA has strict occupancy guidelines that must be met, which limit borrowers’ ability to invest in commercial real estate.
In this comprehensive guide, we’ll cover everything you need to know about using a VA loan for commercial property. We’ll discuss:
- What constitutes a commercial property
- VA occupancy rules and requirements
- Using a VA loan for mixed-use property
- Tips for qualifying and calculating rental income
- Alternative options for veteran real estate investors
By the end, you’ll have a clear understanding of whether or not you can use your hard-earned VA home loan benefit to purchase commercial property. Let’s dive in!
What is Considered Commercial Property?
Before we discuss VA loan guidelines, let’s clarify what exactly is meant by “commercial property.”
In real estate commercial property refers to any building or land that is used solely for business or income-generating purposes, rather than as a residence. This includes
- Office buildings
- Retail stores and shopping centers
- Hotels and motels
- Industrial warehouses and manufacturing facilities
- Apartment buildings (5+ units)
- Vacant land zoned for commercial use
So in short, any real estate asset that is not intended for primary residential living would be considered commercial property when applying for a mortgage.
VA Occupancy and Property Requirements
Now that we know what constitutes commercial property, we can discuss the occupancy rules for VA loans.
The VA loan program is intended to help eligible borrowers purchase primary residences. All VA loans have a set of occupancy requirements borrowers must meet:
- The property must be for your own personal occupancy. You cannot use a VA loan solely for investment purposes or to purchase a second home.
- You must occupy the property within 60 days of closing. And continue to occupy for at least one year, unless special circumstances arise.
- You can purchase a 1-4 unit dwelling. But you must intend to live in one of the units.
So in short, the property must be your primary residence for a VA loan to be approved.
This precludes using VA financing to purchase commercial buildings like retail stores, warehouses, or office spaces. The property’s intended use must be at least partly residential.
Using a VA Loan for Mixed-Use Property
What about mixed-use buildings that have both commercial and residential spaces? This is where things get a bit tricky.
The VA does allow borrowers to purchase mixed-use properties in certain situations. However, there are strict requirements:
- The commercial space cannot exceed 25% of the total floor space
- The property must have a remaining “economic life” of at least 30 years
- There can be no more than 4 total units
- You must occupy one unit as your primary residence
For example, you may be able to use a VA loan for a duplex where you live in one unit and the other is rented as commercial space.
But in many cases, mixed-use properties don’t conform to these requirements. The amount of commercial space may be too large, or the area may be zoned for increased commercial development in the future. In these cases, a VA loan would not be approved.
As you can see, while mixed-use properties provide some opportunity, there are still significant limitations in place.
Tips for Qualifying and Calculating Rental Income
For mixed-use properties that do meet VA requirements, the next consideration is rental income. Counting projected rent from commercial spaces can help borrowers qualify for the mortgage.
However, most lenders will want to see the following before factoring in rental income:
- A 2-year history of managing rental properties
- Signed leases for all rental units
- Sufficient cash reserves (often 6 months PITI)
The amount of rental income counted also varies by lender. For example, Veterans United uses the lesser of:
- 75% of prior verified rental income on the units
- The appraiser’s opinion of fair market rent
So while counting rental income is possible in some cases, there are still strict requirements. Meet with a lender early when considering this option.
Alternative Options for Veteran Real Estate Investors
Given the limitations around using VA loans for commercial property, what are some alternate options for investors?
Here are a few potential avenues to consider:
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Conventional loans – Programs like FHA are an option for larger commercial properties or those that don’t meet VA requirements.
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SBA loans – The SBA 7(a) and 504 loan programs provide financing for small business commercial real estate.
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Traditional business loans – Financial institutions offer commercial real estate loans and lines of credit. Shop around for the best rates and terms.
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Crowdfunding – Platforms like CrowdStreet allow you to pool funds from multiple investors.
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Partnerships – Joining forces with other investors is a great way to gain experience and share resources.
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Creative strategies – House hacking (living in one unit of a multi-family property) allows you to use a residential loan program while earning rental income.
While VA financing may be limited, veterans still have many paths to commercial real estate investing success. Don’t let the occupancy rules deter you from pursuing your goals.
The Bottom Line
The VA loan provides an incredible benefit, but does have limitations when it comes to purchasing commercial property. While mixed-use buildings present some opportunity, VA guidelines are quite restrictive. Before moving forward, carefully review the property and consult your lender to see if you can make it work.
For traditional commercial buildings, the best route is to utilize alternate financing options. Conventional loans, SBA programs, partnerships, and creative strategies can all help veteran investors purchase commercial real estate.
Owning commercial property provides excellent income potential. With proper planning and financing, your veteran status can help unlock exciting possibilities in this competitive arena. Use the guidance above to map your strategic approach.
See What You Qualify For
Select a VA Home Loan Option to Continue:
Before discussing how to use the VA loan for mixed-use properties, it helps to give a brief overview of the VA loan itself.
Initially enshrined in law by Congress in 1944 (though subsequently changed in form several times), the VA loan provides eligible veterans and active service members the ability to receive a zero-down, low-interest mortgage partially guaranteed by the Department of Veterans Affairs. And, unlike other loan products with less than 20 percent down, the VA loan doesn’t require borrowers to pay PMI, saving them hundreds (or thousands) of dollars annually.
These outstanding terms attract veterans looking to branch into real estate investing, as a primary obstacle for many new investors is coming up with the funds for an investment property down payment.
Typically, veterans use their VA loan benefits to purchase properties zoned for residential use (e.g. an existing suburban neighborhood or new housing development). However, understanding what mixed-use properties are – and how the VA loan can be used with them – opens the door to significant investment opportunities for veterans.
A mixed-use property is one zoned by the local municipality (town, city, village, county, etc) for both residential and commercial use. In other words, these properties are legally allowed to include both commercial businesses (e.g. retail spaces) and residential living spaces (e.g. condos or apartments).
In a typical mixed-use property, the ground floor has commercial space (e.g. a retail store or cafe) while the top floors have apartments or condos, though this isn’t a hard-and-fast rule.
Mixed-use Impacts on Refinancing
Once a veteran has actually purchased a mixed-use property with a VA loan, the next consideration is whether the original loan can still be refinanced in the same way a loan for a single-family home would be.
This needs to be addressed through the lens of two different loan products:
- Interest rate reduction refinance loan (IRRRL), a.k.a. “VA streamline” refinance: This VA-to-VA refinance option was designed to allow borrowers the ability to refinance their VA loans to a lower rate without needing to go through the hassle of current income verification, credit check, and property appraisal. Once a VA loan has been approved for a mixed-use property, borrowers can subsequently refinance with an IRRRL product with no additional qualification required.
- Cash-out refinance: On the other hand, if a borrower wants to complete a cash-out refinance of their existing VA loan, they’ll need an additional appraisal to confirm that the remaining residential economic life meets the 30-year requirement. In essence, the VA wants to ensure that the commercialization process in the area has not accelerated since the initial loan, which would indicate that a veteran wouldn’t actually be able to live in a property for the duration of the refinanced loan.
While the idea of using the VA loan to purchase any sort of income-producing property is certainly appealing, lenders won’t blindly accept the potential rent of the non-owner-occupied units in the borrower’s income qualification requirements.
In other words, if you want to purchase a four-unit mixed-use property, just because market rent on the other three units is $1,000/month, a lender isn’t going to automatically boost your qualifying income by $3,000 per month in calculating DTI.
Guidelines for each lender will differ, but, at a minimum, to use rental income from other units towards your own qualifying DTI, lenders will want to see:
- A successful track record as a landlord, documented in recent tax returns
- Signed lease agreements for all rental units
For veterans looking to begin investing in real estate, using the VA loan to purchase a mixed-use property can be an outstanding option. While this path is more restrictive than a standard home purchase, buying multi-unit properties with existing or potential commercial units is a path to home ownership and your first rental units.
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.
Can a Veteran use a VA loan to purchase commercial use property?
FAQ
Can a VA loan be used for commercial?
What is the commercial loan rate in VA?
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Commercial Loan Types
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Average Virginia Rates
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Loan Amount
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Conventional
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5.97% – 10.60%
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$1,000,000+
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Conduit / CMBS
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5.98% – 7.59%
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$2,000,000+
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Insurance
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5.48% – 7.99%
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$5,000,000+
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FHA / HUD
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5.47% – 6.32%
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$5,000,000+
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Can I use a VA business loan for an investment property?
What property cannot be financed with a VA loan?