Okay, this one's not quite exactly from the mailbag. It's a composite question from several different conversations, comments and emails I've had recently.
We are PCSing this summer and want to buy a house. Any tips?
In every situation, I think the other person is sorry that they asked my thoughts. When it comes to active duty military and homebuying, I have a lot of them.
Can You Actually Afford It?Many people decide to buy a house because "the mortgage payment is less than rent." Owning a home costs so much more than the mortgage! Be sure you thoroughly understand all the costs of owning, including mortgage, utilities, home owners association fees, regular maintenance, and all those little repairs.
What's Your Long-Term Plan?Most military families move every 2-3 years. Buying a house and selling it in three years is risky, at best. With paying costs of buying and possibly a funding fee for a VA loan, or points for a conventional loan, after three years, most home buyers still have a loan balance that is higher than what they'll get, after selling costs, from selling. That leaves them with the option to either a) come to the closing table with cash to sell their house, or b) turning it into a rental.
While owning a rental can be a good choice, there are many factors that need to be considered. There are too many to be discussed thoroughly here, but they include:
- the rentability of the particular property: schools, location, home details
- renting price of property compared to the current mortgage plus property management fees (if using a PM), higher taxes, higher insurance, and 20-40% for maintenance and repairs
- volatility of homeowner's association fees, if applicable
- your ability to carry the mortgage if it is vacant
- availability of large maintenance and repairs fund (I like $10,000 per house, separate from your own personal emergency funds.)
- your understanding of the liability involved, and the cost of umbrella liability insurance, if appropriate
- customary property management fees in your market
- your knowledge about taxes in general, capital gains taxes, depreciation, and the recapture of depreciation
- your tolerance for stress and uncertainty
If You ARE Going To Buy
If you've considered all the things listed above, and still want to buy, be strategic. Don't max out your budget. Have a down payment, and don't roll funding fees or costs into the loan. You want to start the owning experience with a loan value that is less than the value of the house, minus the costs you will eventually incur to sell.
A disproportionate number of military homeowners become accidental landlords, so you want a house that is renter friendly and will also be easy to sell if you do decide to sell. Schools are very important, even if you don't have kids in public schools. Proximity to at least one military base gives you a larger pool of renters. At least three bedrooms, and least two bathrooms, are good for single family homes. Fenced yards are very popular, especially if you think you'll allow pets.
This is just a brief taste of the things you need to consider when buying a house while still serving in the military. Be smart, and don't join the thousands of military members who lose money on houses each year.