Some real estate investing hacks are exclusive to service members | Business
When we think about real estate investing, using a Veterans Affairs-Backed veterans home loan is not what comes to mind. It might surprise you that this type of mortgage has traits which provide a unique investing style for those who have served.
These loans, commonly referred to as VA loans, are for those who served our nation honorably in the Armed Forces. When using the VA loan, qualified buyers can acquire property with no down payment. This fact alone demonstrates our service members’ buying power in purchasing real estate compared to the general population.
A requirement for borrowers who use a VA loan is to initially reside in the property when using this type of financing. This is where VA loans are often dismissed as a potential investment tool.
But, this restriction does not inhibit service members from using the VA loan to purchase a home, then when they change duty stations, retain ownership and convert the property to a rental unit.
Active-duty service members are only in one location for a few years until they typically receive orders to move to another part of the country or world. Therefore, under orders of the US Government, they pack their belongings and move. This results in the opportunity to buy another property using the VA loan.
According to Selena Hudson, mortgage banker for Mutual of Omaha, there is a common misconception that you can’t have more than one VA loan at a time. That means you can use your VA loan benefit once you move without selling or refinancing your existing home. Hudson also added that the previously existing VA loan limit was removed on your first VA loan.
On any additional VA loans, a county limit is used to determine the limit of this loan benefit. For the entire state of Kentucky, the county limit for using the VA loan is $647,200.
I used this strategy when I started my real estate investing career. I often was asked by my peers, “Why are you buying a house here? Do you plan to live here after the Army?” To which my answer was a resounding “No.” I bought a home at each duty station because I knew someone would need to live there after I left.
In thinking about renting out our house after leaving in a few years, I planned my purchases so that the rental income would cover all my expenses.
Instead of selling your house every time the military orders you to move, you can allow someone else to reside in your home and pay the mortgage, tax, insurance, maintenance, etc., all for you in one payment they call “rent.” With each rent payment, your loan balances go down, VA loan eligibility goes up and your net worth grows. And with that growth, your ability to acquire another home when you move grows with it.
A common objection to this investing style is the trouble of acting as a landlord from the other side of the world. I can fully appreciate this concern. During my service with the Army, I spent nearly nine years living overseas. I would never have wanted to perform the duties of a landlord while serving in a deployed environment. Instead, my wife and I hired highly qualified property managers to care for our investments so that we could focus our time and energy on things that matter.
Kim Shortt, property manager at TW Shortt Realty, said around 30% of the homes she manages are owned by veterans who use this investment strategy, which has worked very well for them. Shortt added that the key is to work with a management company with a long history in the community and not someone that does this type of work as a part-time agent.
We only purchased single-family homes along the way that is what we wanted to live in. But, if you want to increase the number of rent checks while potentially reducing your risk, the VA loan can be utilized to purchase multifamily residential properties of up to four units.
Using this strategy, you would be required to live in one unit while simultaneously renting out the other three. You can earn rental income using the VA loan while still living in the property.
In addition to the VA loans, service members can take advantage of special capital gains tax rules.
First off, what is the capital gains tax? When the day comes that you decide to sell your investment home, you may need to pay tax on the profit made during that sale. Typically, the Internal Revenue Service allows for exemptions to the capital gains tax if you reside in the home for 24 of the previous 60 months.
IRS Topic Number 701 states this exclusion may allow you to write off up to $500,000 of profit from your home sale on your taxes. As you can see, this is a very powerful tax exclusion.
So, what exactly is the benefit to service members? According to IRS Publication 523, service members may elect to suspend the five-year capital gains tax window on one of their properties for 10 years. In other words, Service Members are given a 15-year window to dispose of one of their investment homes and take advantage of the capital gains tax exemption. Therefore, a soldier could buy a property at the beginning of their military career, sell it about the time they retire and pay no taxes on all the value appreciated.
Before selling your home, a tax professional should be consulted to help you understand the current tax laws regarding your unique situation.
Brian D. Koellish, a realtor, is a military relocation professional. The Focus on Finance column is coordinated by Wright Legacy Group.