Are you sitting on a potential goldmine? If you bought a home with a VA loan and get PCS orders, or decide to retire from the military, you could turn that home into a rental property. If you think you are cut out to be a landlord, you can turn the home you live in into an investment property that brings in additional income. Just remember, renting out your home is a long-term wealth strategy, and not necessarily a short-term cash-making venture.
Here is a guide to renting out a home purchased with a VA loan.
Can You Rent Out a VA Loan Home?
Yes. Renting out a home you purchased with a VA loan is a popular practice.
For the VA to allow you to rent out your home, you must meet VA occupancy rules.
VA Occupancy Rules Explained
To finance a property using a VA loan, you must meet VA occupancy requirements. That requirement is that you have used the property as your primary residence since you closed on your loan.
Although it is not a federal requirement, many VA lenders have a 12-month clause in your mortgage contract. You have to live in the home as your primary residence for 12 months. If you have a valid reason for leaving before the 12-month period, lenders may make an exception.
What Happens If You PCS After Buying?
Getting PCS orders is a valid exception to VA occupancy rules, and you are allowed to rent out your home without violating your loan terms. All you need to do is contact your loan servicer.
Your VA entitlement will still be tied up with your current loan, but you can use your bonus or second-tier entitlement to buy a new home at your next duty station. You will need to have enough remaining entitlement and qualify for the loan based on both mortgage payments. Your lender can use the signed lease agreement from your rental property to offset the existing mortgage, helping you qualify.
Here is a cash flow example of how renting out your $200,000 home in San Antonio after a PCS would work:
Base Mortgage ($200,000 VA loan with 0% down and 6.0% fixed interest rate)
- Estimated Mortgage (PITI): $1,448/month (Includes Principal, Interest, Taxes, and Landlord Insurance) (6.0%/30 year; ~$325 for tax/insurance)
- Estimated Rent: $1,700/month
Gross Rental Income and Operating Expenses
Rental Income: + $1,700
Mortgage: -$1,500
Vacancy & maintenance Reserves (10%) (recommended, but not required): — $170
Total Expenses: $1,670
Net Monthly Cash Flow: +$30
Note: This example does not account for a property manager. You would need to handle tenant screening, maintenance calls, and emergency repairs from a distance.
Even though you are only netting $30 per month, the bigger picture is long-term wealth building. Here is what you are getting:
- Principal Paydown: Leveraged equity building.
- Tax Deductions: You can deduct property management fees, repairs, and property depreciation against your rental income.
- Appreciation: Your home will likely increase in value over time while someone else is paying your mortgage.
Turning a VA Home Into an Investment Property
Turning your home purchased with a VA-backed loan into an investment property is a good way to build wealth. However, because VA loans are designed to help veterans buy a home as their primary residence, there are rules and strategies you need to know.
Occupancy Requirements
You have to certify that you intend to occupy the home as your primary residence. Also, you are expected to live in the home for at least one year before moving out and renting it to tenants.
There are valid exceptions to the 12-month rule, such as PCS or extreme financial hardship. Lenders and the VA will usually grant an exception in these cases.
Your VA Entitlement
If you rent your home and want to buy another home using a VA-backed loan, your rental home affects your VA loan entitlement because it is tied up in the home you are renting.
- Remaining Entitlement: If you have enough partial entitlement remaining, you can get a second VA loan to buy your next home with zero down.
- Bonus Entitlement Cap: If your first loan used up a large portion of your entitlement, your second loan may be capped by conforming loan limits. You may have to make a down payment if the home is more expensive.
Qualifying with Rental Income
If you are buying a new primary residence, you can often use the projected rental income from your first home to offset its mortgage payment.
Landlord To-Do List
- Switch Your Insurance: You must notify your insurance company and convert your homeowner’s insurance policy into a landlord insurance policy.
- Update Your Property Taxes: You may no longer be eligible for homestead exemptions, and converting the home to a rental may increase your annual property taxes.
- Know Local Landlord-Tenant Laws: Learn the local rules governing lease contracts, security deposits, and eviction procedures. If you are moving out of driving range, consider hiring a property manager.
Do You Need to Refinance Before Renting?
No. It’s a common myth that you must refinance your VA loan to an IRRRL or a conventional loan before you can rent out your home. Not true. As long as you meet the VA standard occupancy rules, you can rent it out.
Just know that your original VA loan terms do not change when you convert to a rental, and your entitlement is still tied up in this property until the loan is paid off, or you decide to sell the property. Until then, you will have less than your full entitlement if you apply for another VA loan, and you may need to make a down payment. Check your COE for the amount of your remaining entitlement.
Pro Tip: It is recommended to notify your lender before turning your home into a rental property.
Insurance & Tax Considerations for Military Landlords
Once you begin renting out your property and become a landlord, there are additional factors you must consider. Those factors are insurance and taxes.
Insurance Implications
Renting a property requires specialized coverage. Your tenants will need renters’ insurance to cover their personal property and liability.
- Landlord Insurance: Standard homeowners policies are typically not valid if the home is rented. You must upgrade to a dwelling/fire policy, also known as landlord insurance. It may also cover appliances and maintenance equipment.
- Loss of Rental Income: Reimburses you for lost rent if the property becomes uninhabitable due to a covered claim.
- Liability Protection: Protects you if anyone is injured on your property.
Tax Implications
Even though renting out your home financed with a VA loan is a great wealth-building venture, it changes your tax profile. The property goes from being your primary residence to being treated as a business.
Rental Income is Taxable: Every dollar you make in rent is seen by the IRS as taxable gross income in the tax year you receive it. You will report this income on Schedule E of your Form 1040.
Tax Deductions Offset Income: Having a rental property allows you to deduct expenses, which lowers your taxable rental income. These deductions include:
- Mortgage interest (as a business expense in Schedule E)
- Property taxes and insurance
- Operating expenses
- Maintenance and repairs
Depreciation: You can write off the value of your home (the structure minus the land value) over the useful lifespan of 27.5 years. This lowers your taxable income each year, but also lowers the property’s tax basis.
Capital Gains: The capital gains exclusion is one of the biggest tax breaks when it comes to owning a home. In the case of a rental, as long as you lived in the home for 2 of the 5 years before selling it, you can exclude up to $500,000 of profit from taxes.
Pro Tip: If you have rented the home out for more than three years, you lose this exclusion and will owe capital gains tax.
Depreciation Recapture Tax: Even if you used the capital gains exclusion, you must pay a tax (capped at 25%) on the cumulative depreciation deductions made while it was a rental.
FAQ
Can I legally rent out a home I purchased with a VA loan?
Yes. It is completely legal to rent out your property bought with a VA-backed loan. You first need to satisfy your initial occupancy requirements.
How long do I have to live in the home before I can rent it out?
Normally, you are required to occupy the home as your primary residence for at least 12 months after closing. While this is not an official federal law, almost all VA lenders include a mandatory 12-month primary occupancy clause in your mortgage contract.
What happens if I get PCS orders before the 12-month occupancy rule is up?
PCS orders are an automatic exception to the 12-month rule. You can turn your home into a rental property. You should notify your mortgage servicer of the change.
Do I need to refinance my VA loan into a conventional loan before renting it out?
No. You do not need to refinance or use an IRRRL to convert the property into a rental. Your original loan terms will stay the same.
Can I buy a new home with a VA loan if my first home is a rental?
Yes. You can use your bonus entitlement to buy a new primary residence at your next duty station with $0 down, provided you have enough entitlement left and can financially qualify for both mortgages. A portion of your VA entitlement remains tied up in that property.
Do I need to change my insurance policy when tenants move in?
Yes. You must switch from a homeowner’s policy to a landlord insurance policy. This type of policy covers the physical structure, liability risks, and lost rental income if the home becomes temporarily uninhabitable.
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