BLUF: A house can be a great investment… if you buy the right house. But, buying a house comes with risks, and military life adds to those risks. If you ignore them, it can cost you thousands.
Story time! A couple years into my military career, my wife and I bought a house at our first base. It was a hot market, and everyone was buying houses. We bought one of the only houses that hadn’t sold in our price range. The problem? It was built in 1939 and was in extremely rough shape. Still, we figured we’d fix it up despite having no experience with home repairs.
Shortly after, life happened. Due to a family emergency, we PCS’d to another base a year later. That was 2006… just as the housing market collapsed. Suddenly, we were underwater on our loan and couldn’t sell. As a result, we were forced to rent it out for less than we owed each month… an arrangement that lasted over 10 years. It wasn’t until recently that we were able to refinance. We just listed the house for sale, and we’re looking forward to putting this chapter of our financial life behind us.
The question is, having lived a terrible home ownership experience, do I still think that buying a house in the military is a good investment? Yes, I do. But, you need to buy smart, or don’t buy at all.
Why did I lose money?
“‘Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.” – Robert Kiyosaki, Author of Rich Dad, Poor Dad
We lost money with our first home; but, it was because we failed to look at it as an investment. Instead, we were in a hurry to buy because everyone was buying. We followed the crowd instead of asking whether the house we were buying was a good value.
Since then, we’ve made better decisions. It took several years, but we eventually were able to buy a second house to live in. We bought an inexpensive starter house that was ready to move in. After three years, we sold it for a $30,000 profit. Then, we PCS’d again and bought an even better house that has appreciated $50,000 in two years.
What I’ve learned about buying and selling houses in the military
Learn from my mistakes. Here are some of the lessons I learned the hard way:
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Don’t buy “too much house”. This is the most common mistake (one that we made the first time). A good rule is to not spend more than 30% of your monthly income on housing, to include utilities, home insurance, and mortgage. If you are spending too much on housing, you can easily become house poor, making it difficult to pay other bills, save, or invest in your future. If you can barely pay the monthly mortgage payments, don’t buy the house. You are putting your finances at risk.
- Don’t forget about additional costs, like property taxes and home insurance. When deciding whether you can afford a home, make sure you add up all the extra costs that you will pay when buying a house:
- Closing Costs: When you buy a house, you pay a one-time fee (usually thousands of dollars).
- Property Taxes: Local property taxes are often not included in mortgage estimates but will add hundreds of dollars to your monthly mortgage payments. Find the annual “Property Taxes” on the real estate listing for how much you’ll pay per year.
- Home Insurance: This is much more expensive than renters insurance (you are insuring the full replacement cost of the house, not just your stuff inside it). This can cost hundreds of dollars a month.
- Flood Insurance: If you live in a flood zone (per FEMA’s website), you will be required by law to obtain flood insurance. This usually costs hundreds of dollars a month (on top of your other insurance and taxes). If your house is near any kind of lake, river, or even a tiny stream, you might have to pay flood insurance. Check FEMA’s website to find out.
- Maintenance costs: Home maintenance is a hidden cost, and isn’t evenly distributed. Some months you pay $0, and some months your A/C breaks and you pay $5,000 to replace it. Or you need a new roof. Or a new fridge. The condition of the house you buy will affect how much you will spend.
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Homeowners Association (HOA): In some neighborhoods, you may have to pay HOA fees. HOA areas come with legally-binding rules that restrict what you can do to the outside of your home. It forces everyone to keep their homes looking nice (which keeps property values up), but requires you to ask permission to make changes to the outside of your own house (which is a real pain).
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Before you buy, make sure the house is a good financial investment. Don’t buy any house just because you want to buy a house. The house you are buying needs to be a good investment. Unless you have the skills to renovate houses yourself, don’t buy a house if there are major problems with the house (i.e.major cosmetic issues, bad bathrooms/kitchen, etc.). Never, ever buy a house with foundation problems or crooked basement walls. Buy in a desirable area where houses sell quickly, with low crime and good schools (even if you don’t have school-age kids). Preferably, your mortgage costs (after home insurance and taxes) should be much lower than what it would cost to rent the same house, in case you have to rent it later.
- Buying a house in the military comes with extra risk. Most military members move every 3-4 years (or less, for officers). When you move, you will either have to sell or start renting it out. Unfortunately, you may have to sell after a major downturn in the housing market (causing you to sell at a loss), or you may be unable to sell it at all. The fact that you can’t pick when you sell is the biggest risk when buying in the military.
- Also, some military communities are not good areas to buy. The communities around some military bases are not great places to buy a house. If there are too many vacant houses in your area and houses sell very slowly, it could mean that your house will sell slowly. Some bases are in high crime areas with terrible public schools. If you hesitate in buying a house due to these issues, other buyers will too when its your turn to sell.
- If you rent it out, you will have lots of hidden costs. If you are planning to rent out your house, understand that you will eventually have to manage your rental from another state (or country). Plan to hire a rental management company to handle advertising, rental contracts, and coordinating maintenance requests. However, they will charge an average of 10-20% of your rental income, so plan ahead.
- In addition, you (as the homeowner) are responsible for all maintenance costs. Most repairs costs hundreds of dollars. However, if you rent out your house long enough, you’ll eventually have to pay for major repairs, like $5,000 for a new roof, $10,000 for a new A/C unit, etc.
With all of these negative things to think about, why would anyone buy a house? Well, there are some major benefits to home ownership as well:
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Owning a home allows you to convert (some of) your housing costs into wealth. You might’ve been told that renting is “paying someone else’s mortgage.” That’s true. Though the first ~5 years of your mortgage payments mostly pay for interest on the loan, as you pay it down you slowly accumulate equity in your home. Over many years, you will find that you owe tens of thousands less than your home is worth. This is money you will gain after you sell, or you can borrow against if needed.
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Mortgage interest is tax deductible. Mortgage interest is generally tax deductible if you itemize your tax deductions.
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When you die, typically your heirs usually inherit real estate tax-free. We are all going to die one day. When that happens, most of us will leave real estate behind to our families/heirs. In many situations (depending on the state you live in), your heirs would not have to pay taxes when they inherit real estate. Better yet, when they sell it, they’ll only be taxed at a stepped up cost basis (i.e. the difference between what it was worth when they inherited it and whehn they sold it). This can be a great way to transfer significant wealth to your heirs without having most of it taken by the government as taxes.
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Housing prices tend to increase (a lot) over time. Though you shouldn’t just buy a house because prices might go up, home prices have historically outpaced inflation. You shouldn’t buy a house purely because you think it will be worth more in the future. But, if you buy a good house, you will likely see the value go up a lot over time. (Caveat: If you are forced to sell right after the housing market drops, you could lose a lot of money.)
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No landlord problems. Owning your own home gets rid of any risks from dealing with landlords. Some landlords are not responsive with maintenance issues or they might sell the house you are living in (giving you a short timeframe to move out). You have very little control in these situations, and buying eliminates these types of problems.
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Freedom. Provided you don’t live in an HOA area, you can do what you want to your house. If you can afford a pool, you can. If you want to paint the inside of your house bright yellow, you can. Having the freedom to improve your living arrangements is a priceless feeling. Just know that some changes - like painting your house bright pink - may make it more difficult to sell if and when you PCS.
With all that said, what do I recommend you do?
Buying a house is typically a good investment… but you have to be picky about the house you buy. It needs to be in generally good condition, and in a good neighborhood that you feel safe living in. And, it needs to be a reasonable price that you can afford without straining your family’s budget.
If you are a first time home buyer and don’t absolutely need a big house, buy a small starter home. This will give you a taste of home ownership, while also reducing your financial risk.
As you move from base-to-base, sell your house with each move. If you live in a home as your primary residence for at least 2 of the last 5 years, you do not pay capital gains tax on the profit (per the IRS). This becomes a tax-free transfer of money that you can use to put your gains into a new house, or better yet, you can use to maximize your Roth IRA investments. Or, you can also max out your Roth TSP investments each month (you can increase your Roth TSP contributions and used money from your house sale to offset your lower paychecks each month).
I’d recommend against being an “out of state” landlord if you can help it. It has been a painful experience for our family for a multitude of reasons. Unless you are planning on returning to the house (perhaps after retirement), this arrangement is often not worth the added strain on your family’s finances.
My final advice to you before you buy: Talk to someone who has bought more than one house, and ask about their best and worst experiences. Then, and this is the hard part, listen to what they tell you. You’ll learn a lot of lessons that you’ll (hopefully) not have to learn the hard way.