With the frequent moves that are an ever-present part of military life, there’s a big debate about whether military families should rent their home or buy one. Real estate investments can be a viable way to build additional income while in the military and well into retirement. However, buying a home isn’t without risk. Ultimately, it’s a personal choice, and here are a number of questions that will help you clarify your options.
Is the Home in a State in Which You Plan to Return?
Regardless of the stage of your (or your spouse’s) career, have you considered your plan for retirement? Is this state or region on your shortlist?
If you do choose to purchase and manage the property, consider that you may end up having to hold on to it for many years to make the investment worthwhile as residual income. While you will, most likely, hire a property manager, you’ll also want to be within reasonable traveling distance in case something goes wrong.
For example, if you decide to purchase a home in Washington, but retire in Michigan, the logistics can become challenging. You’ll need to factor emergency travel costs into your budget. There’s also an increased risk of mismanagement, environmental emergencies (hurricanes, floods, etc.), or poor renter behavior if you’re not able to physically visit your properties on a reasonably regular basis.
At the same time, if you find yourself in a state where the property tax laws are very reasonable, you have access to a quality property manager, and you find a house that’s easily affordable to maintain, you may have found a solid investment opportunity.
Does Your Monthly Budget Allow for Costs Associated with Homeownership?
Whether you live in a house, apartment, duplex, or condo, something is eventually going to break or need maintenance. Housing repairs can range from a few hundred to tens of thousands per year.
One of the biggest benefits of living in base housing or rental property is that someone else will foot the bill for repairs (assuming you didn’t cause them). When you’re the homeowner (and the landlord), you’re on the hook for everything.
Zillow.com suggests that you budget for at least 35% of the monthly rental income for operating costs to manage the property and a general rate of at least 1% of the property value to be put towards repairs.
Those estimates don’t include expenses like pest control, utilities, and Homeowner’s Association Fees. Before you decide to purchase an investment property, make sure you have an accurate view of the true cost.
If Your Orders Change Prematurely, Are You Able to Manage Two Payments Until You Can Sell or Rent the Property?
Or, if you decide to rent out the property, can you carry the mortgage on your own for at least six months without straining yourself financially?
If your answer to either of these questions is No, you might want to give yourself a little more time to put funds into a savings account for that purpose before you start signing purchase agreements.
In military life, the only thing constants are inconsistency and change. If the military decides it’s time for you and your family to move after eight months, all of a sudden that three-year window you thought you had now goes out the window. You also have no guarantee of where you will be sent. It may not be feasible to make trips back and forth to make the home renter-ready.
Even if you stay in the same duty station long enough to feel comfortable renting the property, remember that sometimes houses just don’t rent, even if the market says they should.
If You’re Using a VA Loan, Are You Familiar With the Regulations Regarding Primary Residence?
Home loans through the U.S. Department of Veteran’s Affairs (VA) have opened the doors to homeownership for many servicemembers and families. However, if you’re considering using a VA loan to purchase an investment property, make sure you understand the residency requirements.
VA loans are only available for the purchase of your family’s primary residence. Also, if you do move from that residence without selling it, you won’t be able to use another VA loan until the first one is paid in full.
For that reason, you may want to consider traditional financing instead of taking the VA loan route. If you have a good credit score and a down payment for the home, traditional financing may be a better option.
Be sure to do your research on all of your financing options before making a home purchase.
Are You Familiar With the Landlord-Tenant Laws of Your State?
If you’re operating under the assumption that you’ll be able to evict tenants if they pay their rent, or you decide you just don’t trust them in your home anymore, you’ll need to think again.
Every state has unique landlord-tenant laws that are designed to protect both parties. Some states (or cities), however, definitely favor one side over the other. Either way, you may be surprised and the number of legal hoops you’ll have to jump through to remove a bad tenant.
Speaking of bad tenants, if things get ugly, you may have to hire an attorney, which won’t be cheap. You may want to add that to your budget as well.
Can You Afford a Property Management Service?
Whether you’ve decided to retire in the area or not, if you’re active duty, you most likely won’t be able to stay in the same state as your investment property until you close to separation or are already there.
Fortunately, there are many reputable property management services that can help you take care of your property while you’re away. Many of these services will find and interview renters, run background checks, arrange lease documentation, check on the property, and be on-hand to make repairs as necessary.
All of these activities are time-consuming, and hiring a property manager can take a lot of stress out of managing an investment property. However, most property managers charge a percentage of the monthly rent and will bill you for repairs to your home.
Take the time to interview property managers in the area, understand their fees, and consider whether you can afford them while managing the rest of your budget. The sooner you do this, the better equipped you’ll be to understand the true cost of owning an investment property.