Building Wealth with the VA Loan: Cosmetic Repairs and Appreciation
Today's post is a guest post from our friend Jonathan Lee of Military Money Matters. Jonathan studied economics at West Point and has made it his mission to provide high quality educational content to help the military community invest their money wisely. This particular post is an introductory post geared toward those who wish to buy a property, conduct some cosmetic renovation while they live in it, and sell once they have orders to a new duty station. I've included some of my own commentary in italics.
By: Jonathan Lee
The focus of today’s post will be the accumulation of wealth from a powerful tool available to you: the VA loan. For details on how to use your VA loan, see our post here. Today’s topic will be understanding how to generate wealth from the loan. There are two ways to do so: cash flow on rental properties (after you’ve moved out) and appreciation. Today we will talk about appreciation.
Appreciation is an increase in the value of the home you purchase over time. For example, if you purchase a home for $120,000 and sell if for $150,000, it has appreciated by $30,000. Bear in mind that there are significant closing costs associated with selling a home so all of that money doesn’t necessarily go to you. You can typically expect to pay between 6% and 10% in commissions, closing costs, and maintenance expenses on the sale. Here’s a 3 step look at how to make money through appreciation with your VA Loan.
Step 1: Choose the right home! If you’re looking to make money from appreciation this step is essential. Certain areas appreciate more than others. Hawaii, for example (where I purchased my first home) tends to appreciate rapidly. Look at historical data for the community to see what drives growth. The Zestimate (see Zillow.com) may provide a good tool at predicting prices as well, but given the number of factors that drive house prices, it’s not always accurate. Editors Note: Realtors hate Zestimates, but if you aren't a real estate agent or haven't been tracking the local market, Zestimates aren't a bad place to start. Just don't be surprised when your agent tells you that the Zestimate is wrong.
Other things to consider on this step include the specific neighborhood and the quality of the home. If you’re trying to flip the house, you never want to purchase the nicest house in a bad neighborhood. It’s already been flipped! You also don’t want one that’s already entirely redone. Try to avoid those granite countertops when purchasing a home you intend to add value to. Additionally, look at big projects in the area. Is a new shopping mall going up? Is the city undergoing a huge re-imaging campaign and building new parks and recreational areas? If the answer is yes, that’s a good sign. Editors note: Check out our post about future development in Savannah here and here. Jonathan gives great advice when he says to avoid the nicest house in the neighborhood, and it's also not wise to renovate into becoming the nicest house-- spend enough money to make your house as nice as other recent renovations in your area and no more. It's also important to note that when buying a house that needs work with a VA loan, cosmetic repairs are fine but if there is anything wrong with the home structurally or mechanically, the VA will not underwrite the loan.
Step 2: Renovate! If you’re looking to increase the value of your home, certain upgrades pay off more than others. As a rule of thumb, minor kitchen and bathroom improvements drive up the value of homes, but don’t shoot for anything excessive. Top of the line granite countertops do just about as much as generic granite. The top value producing renovations are listed here. If you’re really looking to generate wealth through appreciation, this can be a powerful step if you purchase older homes, foreclosures, or short sales. In these homes, however, check to ensure that the home is available to purchase with a VA loan first! Also, make the home look good for staging. Prior to selling, consider a new paint job, modern light fixtures, or other small repairs. Editors Note: You don't always have to renovate to see a nice appreciation on a home. If you PCSd to Stewart in 2013 and bought a nice three bedroom home in Georgetown, for example, you likely paid about $135k. That same home would sell for about $165-170k today even if you did no renovations. However, if you only spend two to three years at a duty station, it is unlikely you will see great appreciation in that short amount of time-- but you'll still have more money in your pocket than if you rented!
Step 3: Timing the sale This is probably the hardest step but can significantly impact the sale price of your home. While you need to do what’s right for you, (maybe you’re about to PCS) timing the sale can make thousands of dollars in difference. In certain markets, for example the summer moths cause a boom in housing prices of 2-3%. People like to purchase homes in the summer because their kids are out of school or they’re PCSing to a new location. Editors Note: The Savannah market specifically does see these shifts, and they are more pronounced as you get closer to Fort Stewart. I think 2-3% is a tough high for the change in pricing here, typically prices will remain similar but days on the market may increase during the winter months.
If you purchased in that up-and-coming neighborhood, the time to sell might be when 50-75% of the homes in the area have also been renovated or “flipped.” Maybe the new park down the street has been built and you’re ready to sell.
Editors Note: To me, the best time to sell if you're a novice is when it's time to PCS. If you're interested in making money by flipping houses, then I recommend buying a second house to work as a flip from day one. Flipping houses is part science, part art, and to really make the best returns you have to buy a dump of a place, fix it up to be line with what the market wants, and sell quickly.
Trophy Point Realty Group would like to thank Jonathan for letting us cross-post this blog, and we look forward to some more collaboration the future! If you are in the military or a veteran, you really need to go check out his blog -- he's got great insight on everything from real estate, the TSP, blended retirement, GI bill, transition, and everything in between. www.militarymoneymatters.org
Interested in using this plan to build wealth here in the coastal empire? Trophy Point Realty is owned by military veterans who have used the VA loan themselves and are experienced in renovations. We'd love to be your trusted advisors and we work in Savannah, Hunter AAF, Fort Stewart, Hinesville, Richmond Hill, and Pooler. Get in touch with us today!