Can You Use a VA Loan for an Investment Property?

The VA home loan program provides many benefits to eligible veterans active duty service members, and surviving spouses. These government-backed loans require little to no down payment and have competitive interest rates. With so many advantages, it’s natural for borrowers to wonder if they can use a VA loan to purchase an investment property.

While VA loans must be used to purchase a primary residence, there are some ways veterans can invest in real estate using their loan benefits. In this comprehensive guide, we’ll cover everything you need to know about using a VA loan for an investment property.

VA Loan Basics

First, let’s review some key facts about VA loans:

• VA loans are guaranteed by the Department of Veterans Affairs. This means if the borrower defaults, the VA will reimburse the lender.

• Because they are government-backed, VA loans offer lenient qualification guidelines. Borrowers can qualify with lower credit scores and debt-to-income ratios.

• Little to no down payment is required. VA loans only charge a funding fee that can be financed into the loan.

• VA loans can only be used to purchase or refinance a primary residence. Investment properties do not qualify.

• Occupancy requirements state the veteran must move into the home within 60 days of closing

So at first glance, it appears VA loans cannot be used for investment properties. But there are some exceptions, which we’ll explain next.

Exceptions for Using a VA Loan as an Investment

The main barrier to using a VA loan on an investment property is the occupancy requirement. However, veterans still have options to invest in real estate while meeting residency rules. Here are two creative solutions:

Rent Out Rooms in Your Primary Residence

If your VA-purchased home has enough space, you may be able to rent out extra rooms or a guest house. As long as you live in the main house as your primary residence, renting accessory dwellings is allowed. For example, a veteran could use a VA loan to buy a house with a basement apartment, then rent out the apartment while living upstairs.

Purchase a Multi-Unit Property

VA loans can be used to purchase duplexes, triplexes, and fourplexes. However, the veteran borrower must reside in one of the units. For instance, you could buy a quadplex with a VA loan, live in one unit, and rent out the other three.

This strategy, often called “house hacking,” allows the veteran owner to collect rental income to help pay the mortgage. As long as one unit remains their primary residence, this use of VA financing is perfectly acceptable.

In both cases—renting out rooms or units—it’s smart to get pre-approved for the VA loan before shopping for properties. This will give you an idea of your purchasing power so you can look for homes with adequate space to generate rental income.

Now let’s dive deeper into VA loan entitlement, a key factor when using your benefits for an investment.

Understanding VA Loan Entitlement

VA loans are guaranteed by the VA, not directly funded by them. The guaranty is referred to as “entitlement.” The amount of entitlement you qualify for determines how much the VA will back your loan. Here are some key points about entitlement:

• Basic entitlement – This guarantees 25% of the loan amount, up to $36,000. So on a $144,000 loan, the basic entitlement would be $36,000.

• Bonus entitlement – For loan amounts above $144,000, bonus entitlement kicks in to guarantee 25% of the additional amount. For example, on a $200,000 loan, the basic entitlement covers the first $144,000. Bonus entitlement guarantees 25% of the remaining $56,000.

• Funding fee – This upfront fee is 1.4% – 3.6% of the loan amount. It can be financed into the loan. Disabled veterans and surviving spouses may be exempt.

• Entitlement reuse – VA entitlement can be restored after paying off the loan for reuse on another VA purchase. Entitlement may also be transferred to an assuming homebuyer.

Understanding entitlements ensures you maximize the use of your VA benefits when purchasing an investment property.

Purchasing a Second Home with a VA Loan

Many veterans wonder if they can buy an investment property with a VA loan if they already used their benefit to purchase their current home. The answer is yes—with a few caveats.

You have a couple options for buying again with VA financing:

• Pay off current VA loan – If you sell the current home or pay off the loan, your entitlement will be restored in full to use on another purchase.

• Keep current home as rental – You can rent out the current VA-financed property and purchase another home as your primary residence. You would need to qualify for both mortgage payments.

The second option allows you to keep the current home as a rental property for added investment income. However, you will only have your remaining available entitlement to apply toward the new loan.

No matter which option you choose, it is possible to buy again with a VA home loan.

Using a VA Loan to Purchase a Commercial Property

The VA has strict occupancy rules for properties purchased with their financing. As a result, commercial properties do not qualify for VA loans. The property must remain residential for the life of the loan.

However, veterans can purchase a mixed-use residential/commercial property under certain conditions:

• The commercial space cannot exceed 25% of the total square footage
• No more than four housing units in the property
• The property must have a remaining economic life of at least 30 years

So while a 100% commercial property isn’t allowed, a veteran could utilize a VA loan to buy a small mixed-use building to live in and operate a business out of a portion of the space.

The Benefits of House Hacking with a VA Loan

House hacking with a VA loan can be a strategic real estate investment for qualifying veterans and service members. Here are some of the top benefits of this approach:

• Little to no down payment required – Without the VA loan benefit, a large down payment would likely be needed to buy a multi-unit dwelling.

• Tenant income offsets mortgage – Rental income from occupied units helps pay the mortgage, providing affordable housing for the veteran owner.

• Build equity – As the loan is paid down, the property appreciates, allowing the veteran to build equity they can later use to invest in more real estate.

• Gain landlord experience – Managing the rental units provides on-the-job training for those looking to become full-time real estate investors.

While house hacking isn’t for everyone, it can be an effective real estate investment strategy for savvy VA borrowers.

The Bottom Line

VA loans offer veteran and military homebuyers many advantages and flexible options when it comes to purchasing investment property and rental housing. While occupancy requirements must be met, the ability to rent out a portion of your primary residence or utilize a multi-unit dwelling can provide solid real estate investment opportunities with little to no money down through the VA loan program.