Today, I saw a house hunting television show with a young military couple in Hawaii, buying their first house. For a little background, they’d been on-island for over a year, and she was a student and he was on active duty. They had a budget of $500,000.
Usually, I am able to watch these house hunting shows without thinking about whether the family can actually avoid the purchase. However, with a military family, I couldn’t get past all the red flags.
House buying as a military family is very different from house buying as a civilian family. The major difference is that military families can reasonably expect to move every few years. Yes, I know that some military families stay in the same place for longer, but that isn’t typical and that expectation should not be part of the decision to buy. As a military family, you must decide to buy with the expectation that you will move. With the couple on the TV program, they’d already been in Hawaii for over a year, so even if they have four-year orders, they should be thinking that they’ll be moving in just two to three years.
Because of the costs of buying and selling a house, you will almost always lose money if you sell just a few years after buying. Therefore, military families have to assume that the house that they buy will become a rental property. Ideally, becoming a landlord should be a well thought out choice, not a last resort when you can’t afford to sell. If you are military, and you’re not interested in becoming a landlord, than home-buying is probably not the best option for you. I wasn’t surprised that the television show didn’t discuss rental issues, because that isn’t how these shows work, but I do hope that the couple had considered this.
If you accept the fact that you’ll likely become a landlord, and you still want to buy, then you need to make a smart decision that will make renting a realistic possibility. Buying a rental property is entirely different from buying a personal property. You have to ensure that the rental market will bear the cost of the mortgage (including principal, interest, taxes and insurance), plus a realistic amount for repairs and maintenance (I use 30% on my own investment properties), plus the costs of property management if you don’t have the skills and interest to self-manage. This typically means that you have to buy very specific properties, because most markets don’t just have these conditions.
In addition to making sure that the numbers work for renting, you need to think about whether those numbers will remain the same. No one can tell that for sure, but there are things you can do minimize the risk. Buying in stable areas with diverse economies is better than in “booming” areas or areas with a large military population. It was interesting to me that the program was house hunting in an area where I watched hundreds of foreclosures and short sales when I was in the mortgage business a couple of decades ago. Military friends of mine faced foreclosure in that same zip code because the market changed, they moved, and they couldn’t sell or rent.
Outside of the property’s viability as a rental, you need to make sure you can afford the property even in worst-case scenarios. In my counseling, I advise clients to be sure that they can afford the mortgage payment and the maintenance costs even if they have to PCS and can not sell or rent their house. Basically, you need to be able to take the mortgage plus 30% out of your budget each month and still be OK. It sounds like extreme advice, and very few military families can meet my stringent criteria, but there’s a good reason for it. I’ve seen far too many families who have blown through all their savings (including retirement), borrowed from families and friends, and still ended up with a short-sale or foreclosure. That can be a loss of tens or hundreds of thousands of dollars.
All of these concerns are on top of the usual home-buying issues: purchasing a solid, well-priced house, in the right area, with the right loan. It’s not easy!
Buying a house is always a big decision. Buying a house as a military family is an enormous, really hard decision. And despite what society might say, buying a house isn’t always the American Dream, and renting is rarely “throwing away your money.” If you’re thinking of buying a home, please make sure you’ve thought through all the issues before making a final decision.