3 Warnings for Prospective Military Homeowners
The argument of renting vs. buying for most people revolves around stability, tax breaks and having something to show for your monthly payments.
For military personnel, most of those arguments are non-factors, as your next PCS move could be just a year or two away, and you get special tax breaks from Uncle Sam that are very different from the average American.
Rob Aeschbach, a retired Marine and the founder of the Military Financial Planner LLC -- an investment advisory firm based in Norfolk, Virginia -- says, "I do what I can to talk people out of buying a house unless they've already shown the skill and guts to handle being a landlord."
While in certain cases it may benefit you to purchase a home, here are some warnings to consider when thinking about buying instead of renting:
1. You may not get much of a tax break.
For regular homeowners, the tax benefits are often a tipping point when deciding between buying and renting. Military personnel, however, are taxed differently and therefore don't reap the same benefit. After taking the standard deduction, there may not be much left to be taxed on for a military member, since you are eligible for tax-free combat pay, tax-free living and housing allowances, moving deductions and free tax preparation.
The way the military pay scale is set up, a family with kids has even less to be taxed on after taking the deductions for dependents. Aeschbach points to the 2015 military pay table, which shows that a married couple with two children would pay no income taxes up to $48,080 in annual income; that includes most enlisted families up to an E-7 over 12 years.
Aeschbach explains, "I've had people come to me and say 'I'm paying too much in taxes, I need a tax break, I'm going to buy a house.' [I tell them] 'You're paying nothing in taxes, why would buying a house give you a tax break?' They don't realize it until you do the numbers with them that, especially [if you have] kids, there is no tax break."
2. Being a long distance landlord can be very costly.
Owning a home comes with the obvious costs of property taxes, insurance and mortgage payments, but if you chose to rent the house out after you've moved to your next station, you also need to pay a property manager to take care of the place since you're not around.
Paying someone to oversee the day-to-day aspects of being a landlord in your absence cuts into your profits from collecting rent, but isn't the largest cost you need to consider. You'll also be assuming all maintenance costs for the home, which is typically not properly accounted for.
"For a rental property I'd estimate 2 percent of the home's value per year on maintenance. So for a $200,000 house, expect to pay $4,000 per year on 'stuff' that the landlord pays for. That could include irregular big ticket items like replacing a deck, carpet or water heater," says Aeschbach.
You also have to realize that you won't even be the one enjoying or getting to use that new deck, washing machine or bathtub you put in. Those assets are depreciating under your tenants' watch.
3. It may not be the good investment you think it is.
First of all, you may be in the house for only a few years before getting transferred, and at that point, your options are to hold the property and rent it out, or to sell right then.
You can't expect your property value to go through the roof in the short term, and even if you do find yourself with a booming housing market, the costs of serial buying and selling are prohibitive, so it's hardly a get-rich-quick scheme. In the other scenario, assuming you can afford all the costs associated with buying a house, maintaining it and being a landlord, it still may not make sense to own.
Finding regular tenants can be difficult. If you're renting to military personnel, they will insist on a military clause in the lease that gives them the right to vacate your home with only 30 days notice; not leaving you with much time to find your next rent check. Any amount of time that your property is left vacant can be completely detrimental to your bottom line.
"The real risk," explains Aeschbach, "is when you are without a renter. Most savvy landlords would tell you to have three months of mortgage payments saved up in cash in case you have a vacancy."