Over the last several weeks we’ve been discussing a variety of off-base military housing topics. Many of these have been geared toward borrowers who are struggling to repay their home loans and to those who don’t know much about real estate and are learning basic terms and concepts for the first time. Today, we are shifting gears a bit to talk about a much different topic—owning a second home while in the military as an investment property. Chances are that people in this situation will be a little more financially savvy and more familiar with the homebuying process, having gone through it at least once before. Still, this is a very complicated situation and requires careful thought and consideration.
Why this Might be a Good Idea
In our article about Permanent Change of Station (PCS) we shared the views of one servicemember who made it clear that, in his opinion, owning a home in while in the military is rarely a good idea. In fact, he waited until retirement before purchasing his first home. Today, we are talking about owning two homes while serving, and you might be wondering how this could ever be a good idea.
Well, when a servicmember receives PCS orders, they have to leave behind the home they own and face the decision to rent or sell. In planning for their new destination, they are then faced with the question, “Do I rent or buy?” Depending on their needs, financial situation and the status of the housing market, these can be challenging questions. Many who make the decision to buy a new home do so because they want to build equity each month, rather than “losing” their money by paying rent—something that doesn’t offer a return. And in some cases, particularly in the current market with high rent prices, it can actually be cheaper on a monthly basis to own the home. Those who choose to rent the old home have a similar mentality. they want to maximize the income they receive from the first property, and think that renting it will provide a better return than selling.
And let’s not forget, this strategy can help consumers create wealth and net worth while also keeping their credit score at a good level.
There are two main challenges in this scenario. The first has to do with the property that was left behind. That property, if not sold, essentially becomes an investment property. It will need to be rented at all times (each month without a rented is a month you have to pay for) and needs consistent maintenance. Both of these are hard to do when you are far away.
Emotional Attachment and the Decision to Sell
You should also seriously consider selling the home. In the first podcast below, Amanda tells us that she kept her first home because she didn’t plan to be gone for very long and she had a strong emotional connection to the home. It’s certainly a viable strategy to rent out the property, but not always. Once you take emotional attachment out of the equation, you will want to know that the return on your investment property is greater than other returns you could make by investing elsewhere. To help determine this, you can talk to a financial advisor, or potentially use a tool like a “Rent or sell?” calculator.
More than likely, the owner will need to rely on a property manager to handle the responsibilities of a rental property. The manager can vet potential renters, handle the contracts and so forth, and schedule maintenance as needed. The drawback with a property manager, of course, is that they charge a fee for their services. This can vary, but the fees are typically between eight and 10 percent of the monthly rent payment. You may also pay more if the service of finding a tenant is charged separately.
Aside from a property management group, you will want to keep up with professional contacts that include plumbers, electricians, general contractors and lawyers. While the property management group can facilitate most repairs, it’s still a good idea to have your own contacts and to manage projects yourself when possible. In some cases, the renters’ insurance will cover the costs of repairs, but when that isn’t the case, you will be responsible and it might be nice to control the situation a bit more than just relying on the manager.
As far as lawyers go, you’ll want to have someone who you can trust and who is available when you need it. In the podcast, Amanda explains that she has evicted tenants on multiple occasions. This required a lawyer, but also quite a bit of her time to handle the situation, make additional repairs and so forth.
The other challenge lies in the new property. First, you’ll need to determine how much you can reasonably spend on the home. Has your spouse already secured a new job? Is your debt-to-income ratio within a healthy range? Not only will lenders what to know these answers, but they will help you and your family determine what you can realistically afford. You also need to keep in mind that you might get PCS orders again, so be sure to think realistically about how long you plan to live in the home.
Keith, one of the podcast interviewees, explains that his minimum for buying a home was a three-year expectation of living in it. He admits that even the three-year rule is pretty aggressive. In fact, many realtors recommend that you plan to live in your home for somewhere between five to seven years as a minimum. But again, this can vary depending on market conditions and how the home is financed. Speaking of financing, you will need to figure out how to finance your second home. There’s a good chance that you’ll be able to take advantage of the VA Loan again, so explore that option first.
Questions to Ask Yourself
Before you make this big decision there are a few main questions to ask yourself. They include:
- Is my original home in a good rental market?
- Do I plan to occupy my original home again one day?
- Is now a good time to buy a home in my new location?
- What is the cost of living in my new location?
- How long do I expect to live in my new location?
- How much do I have on hand in cash reserves?
What’s the worst-case scenario?
If you’re in the position of owning two homes, you will want to be consistently guarded against the worst-case scenario. You will do this through an established emergency savings fund. Both interviewees in the podcasts recommended that you have $10,000 set aside for this purpose. That’s certainly a lot of money, and would cover a big repair (such as a new roof) in most cases. However, that figure might be an underestimate. If you have two homes, you need to consider that many things could go wrong in each home. For instance, what if both homes needed a new roof and the rental property didn’t have a tenant? It may sound far-fetched, but it’s a reality you need to be prepared for.
Be sure to set aside money each month in this “worst-case” fund, and try to have at least $10,000 set aside and available immediately after you purchase the second home.
The interviewees in this week’s two podcasts gave a variety of creative tips for making it through this process in a financially sound way. Here are some of our favorites:
- Thoroughly evaluate potential tenants and run a credit check
- Make sure the rental property is appealing
- Use popular styles and colors inside the home
- Avoid low population areas (such as rural areas)
- Opt for property near transportation infrastructure (like highways and interstates)
- Select a home in a good school district
- Put renovations and repairs on payment plans with zero interest if possible (in situations where you can’t comfortably afford the whole cost)
- Have a solid timeline plan for how long you will be in the home
- Consider renting to friends or family
This Week’s Podcasts
Check out these two podcasts, which discuss owning a second home in more detail.
Podcast 7: Veterans discuss the issues surrounding owning a second home while serving in the military.
Podcast 8: An officer discusses strategies for homeownership as an investment.
Want more help or information?
As you can see, there are many factors to consider when moving in the military and deciding what to do with your old and new homes. Hopefully the tips and information we’ve provided here can help you make the best decision for you and your family. Remember that there are resources designed to help you. If you ever need more help with military-focused financial concerns, or have general questions about credit and housing, contact us through our Reconnect program, and we will be happy to help!
Thomas Bright is a longstanding Clearpoint blogger and student loan repayment aficionado who hopes that his writing can simplify complex subjects. When he’s not writing, you’ll find him hiking, running or reading philosophy. You can follow him on Twitter.
This post was first published by Clearpoint. To speak with a Clearpoint Credit Counselor, call 888.808.7285 or learn more about their Military Reconnect Program.