Investment homes: Knowing your exit strategy

HG Television has exploded with home improvement and flipping series over the past decade. This has given rise to the average joe trying their hand at purchasing and renovating investment properties. While this can absolutely be an extraordinarily effective way to build wealth, it can also end in loss if you aren’t financially able to handle what comes with it. 

We spoke with Caliber Home Loans VA Home Loan lender and veteran military spouse, Michelle Crumley, to answer all your deep and burning questions about this process. This isn’t a piece to discourage you from investing in real estate but rather a transparent letter to you, ensuring you are ready and have the information you need to make the best decision for your family. 

Investing in Real Estate

Question: How do you know you are ready to do this?

Answer: Choosing to start investing in real estate as part of your financial plan is all about being prepared and having a plan. It might be deciding to keep your current home when you PCS to your next command, or it might be purchasing a property strictly as an investment. Both can have a place in your plans, and it is important to understand the mechanics and requirements for each. Above all, you need to make sure you have shown that you can effectively save money, stay on budget, and have a good down payment or emergency fund in place. The long-term rewards of real estate investments can be huge, but they aren’t for the faint of heart. 

Question: What are your tips and tricks for this endeavor?

Answer: Many times, the easiest and least expensive option is to keep your existing home and turn it into a rental when you move to your next home. You already own the home and likely have good financing terms on the home. As you purchase your next home at your new command, since you are purchasing your new primary residence, you will have better financing options as well (you have better financing options when you are purchasing a primary residence versus purchasing a vacation or investment property).

Down Payment on a Second Home or Investment Property

On the other hand, you can buy a second home (vacation home) and use it part-time as an investment/rental. A vacation home generally requires a 10% down payment, but one way you may be able to minimize the amount you have to pull out of other investments for the down payment is to use the equity you have in your current primary residence. If your home has increased in value, you can talk with a lender about refinance or home equity loans/lines that will allow you to tap into some of the equity to use as the down payment.

If you are purchasing an investment property, being ready to put at least 20% down is a good rule of thumb. Again, depending on the equity on your current homes, you can look into financing options that may allow you to use that equity for the down payment.

Question: What are some laws or regulations to consider when buying investment property?

Answer: The Tax Laws are always changing, so make sure you have talked to your financial advisor and/or tax accountant to ensure you understand the tax ramifications. This is important whether you are talking about rents, depreciation, and net proceeds from the sale of the property. Vacation homes and investment properties are treated very differently than your primary residence. 

You also need to talk with your insurance company – rental properties along with furnishings are handled differently than your primary residence as well.

Pros and Cons of Investing in Real Estate

Question: What are potential drawbacks to purchasing investment properties? 

Answer: You need to make sure you are ready to be a landlord, as well as which kind (active – you handle collection of rents, repairs, questions, needs, etc. or passive – you hire a property manager). Renters can be a bit finicky, so always ensure you have financial reserves to handle the monthly payments yourself when you don’t have renters occupying, as well as for any necessary repairs. Expect to replace carpet/flooring and paint routinely between renters.

Question: Lets end on a happy note – what are some of the positive impacts to purchasing investment properties?

Answer: Real estate as an investment provides both short- and long-term opportunities in your financial plan. It can provide monthly income through the rents received, and ideally when you sell you will have the recognized equity from the increase in value. These can be huge positives as you plan for retirement.

Whether it’s your first home or your third, Caliber can help guide you through the VA mortgage loan process. Find a Military and Veteran Lending Professional near you or fill out an application online.

This communication is intended to convey general information only and not to provide any legal or accounting advice or opinions. An attorney or accountant should be consulted for specific information.

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