Should We Rent or Buy a Home?
Factors to Consider
Rent or Buy a Home? - Ask These Questions
When you receive orders to a new duty station and begin to think about where your family will live, you probably will ponder whether you should plan to rent or buy your home.
(Note: This is Part 2 of an article exploring whether military families should rent or buy a home. If you landed on this page from the search engines, you will want to read Part 1 before continuing.)
To help you make the decision whether to rent or buy a home for your family, consider the following:
- Rent or buy a home? Will I be stationed in one city long enough for buying a home to make sense? Most of the time, you will have a general idea of the length of your tour. Yes, there are the occasional surprises - it's the nature of the military. But you should have a good idea how long you can expect to be in that location.
As a general rule, your home will need to appreciate (increase in value) by at least 10% in order for you to break even when selling your home. How long that will take will be different in each location, and often, from one neighborhood to another. So there's no hard-and-fast answer to that question. You will have to make an educated decision based on all your circumstances, and take into account the possibility of renting your home to another family when you are transferred to a different location.
- Rent or buy a home? Would we be comfortable renting our home if we can't sell when I'm transferred? Many people are uncomfortable with the idea of having someone else live in their home, especially if they think they may want to live in the house again, because tenants may not take care of the house the way you would. This is one place where renting to other military families can be a good idea.
Military families generally take pride in their homes and because of the discipline inherent to most military members, they are likely to take better care of it than some other tenants might. They also know you will always be able to find them and can contact them at their new command if they tear up the place. That can work in your favor.
If you do become a landlord, you will want to make sure you secure a landlord insurance policy that will cover you against accidental or malicious damage by a tenant (beyond normal wear & tear), loss of rental income (if, for example, damage to the property requires it to be vacant while repairs are made), rent default, theft by tenants, and legal liability insurance to cover you in the event someone is injured on the property. Not all landlord insurance policies have all these provisions, so be sure to read the fine print before purchasing the policy. Your property management agent may be able to help you locate the best policy. Don't skimp on landlord insurance, or think that your homeowners insurance is sufficient. It isn't. And remember to take the premium amount into consideration when determining what you will charge for rent.
- Rent or buy a home? How do I feel about being a long-distance landlord? This is a factor that scares many people. They worry that they just will not be able to keep a close enough eye on the property, especially if they're stationed thousands of miles away. This is where it makes sense (and in my opinion is essential) to hire a local property manager to take care of the property for you. They can schedule "surprise inspections" to ensure that the property is being properly taken care of, and let the tenants know that just because you may be thousands of miles away doesn't mean that no one is watching the property.
- Rent or buy a home? Can I afford to hire a company to manage the property in my absence? The usual fee for this type of rental management is ten percent of the rent amount, so if you are charging $1200 a month for rent, you will pay your property manager $120 a month, and you will net $1080. (Remember that from that amount, you need to pay your mortgage principal and interest plus any taxes and insurance, plus any set-aside for a maintenance and repair fund, so be sure you consider all those things when you set the rent amount.) But that $120 seems a small price to pay for the peace of mind it will create, so you can relax and know your property is being taken care of.
Even if that $120 a month comes out of hide (if you can afford it), you will still be ahead in the long run to have that investment creating equity for you. Where else can you create a nest egg worth hundreds of thousands of dollars for just $120 a month? This is a critical factor that many families fail to consider when deciding whether to rent or buy a home.
- Rent or buy a home? Does my budget have wiggle room to accommodate rental income that might be less than my monthly house payment? And/or to cover the cost of landlord insurance and property management, plus maintenance and repairs set-aside? This is a question that each family will have to weigh in their decision whether to rent or buy a home, and decide how the various scenarios will impact their financial situation.
You always want to make the property pay for itself if possible, and you need to plan it that way from the beginning. NEVER intentionally plan to have a negative cash flow! However, if you find yourself in a scenario where the market will not support the sale of the property at a reasonable price, and you have to rent it at a slight negative, and if your budget can absorb the negative, you likely will still be ahead in the long run. Your tenants can be paying off your mortgage and creating your retirement account for you!
Did you find that you answered no
more times than yes
? If so, your no's may be an indication that you need to look further into whether to rent or buy a home before you proceed.
There's a lot of information to learn and understand in order to make a wise decision on buying a home that you can sell at a profit, or that you can rent for enough to make the mortgage payments and cover the other expenses. A good rule of thumb is that you should set aside 5% of the rent amount as a repair fund, so that when those unexpected expenses arise, you're not caught off guard.
On the flip side, don't get discouraged and give up on your dream. Owning your own home is the American Dream, and you don't have to give up on that dream just because you chose military service. Owning your homes is the easiest way for a military family to create wealth and build a comfortable nest egg for retirement to supplement your military retired pay (which by itself will not be enough).
So, don't make the decision whether to rent or buy a home without doing a thorough investigation, or you will be cheating your family out of years of financial benefits.
VA Mortgage Loans
Did you know the United States government has special programs to encourage home ownership by military families?
Since 1944, the year of the original GI Bill, VA has guaranteed more than 18 million home loans worth over $911 billion. The VA mortgage guarantee program has helped the dream of home ownership to become a reality for numerous military families over the years.
To support veterans and active military in achieving the American dream of owning their own home, VA loans provide zero-down-payment options to make home buying more affordable. They also impose stringent requirements on the seller for your protection, and require the seller to pay certain escrow fees, in order to provide further protection for you as the buyer. (For this reason, some sellers don't like for you to use a VA loan, but that's your choice.)
Learn more about VA Home Loans from the nation's #1 VA purchase lender, VA Mortgage Center.com.
Imagine these two scenarios:
The Smiths and the Joneses
The Smith family decides there's just too much risk in buying a house. Neither Mr. or Mrs. Smith feels comfortable about what might happen when they get orders, so each time they're transferred to a new duty station, they decide to rent vs buying a home. They can never paint their rooms in jazzy colors, or landscape the way they prefer, but they get used to "eggshell white" walls and convince themselves they don't really care about landscaping anyway. They never build up any equity or take advantage of the tax benefits of owning a home. On the other hand, they don't have to worry about the cost of repairs or maintenance -- they just have to call the landlord and wait for him to send someone to make the repairs (which isn't always as simple as it sounds). At the end of 20 years, when it's time to retire, they have a stack of rent receipts and no "nest egg" from which to make a down payment on a retirement home.
The Joneses, though, investigate their different alternatives as they consider whether to rent or buy a home. They learn more about what their options are when they get transferred, and decide to invest in buying a home in their first "permanent" duty station. They expect to live there for three years, so they think the benefits will outweigh the disadvantages, and that the home will increase in value enough for them to more than break even when they sell.
They do their homework and find a home they love in a neighborhood close to the base, at a reasonable price. They know the neighborhood will be attractive to other military families, and in fact, most of their neighbors are military families. And because they did their homework, they know that their mortgage payment is something that will be affordable as rent for a military tenant.
As it gets close to time for orders, they start investigating the local market to determine whether it's a stronger rental market or sales market, and they calculate the likelihood that they may be stationed there again.
After checking into all those things, they think there's a chance they may come back in a few years, and they really like the house, so they decide to keep it and rent it out. They find a local real estate company to manage the property for them because they know that a local representative can help them keep a better eye on their property.
All that planning pays off, because when their orders come, the Joneses learn they will be going overseas for the next 2-3 years. While they're out of the country, their home investment continues to grow in value and create equity for them, they enjoy the tax advantages of home ownership, and their tenants are making their mortgage payments.
They continue the pattern they started early in their military career, buying homes at each new duty station where they expect to stay for at least three years. Even though they never go back to the same duty station twice, they've been able to find attractive homes at reasonable prices wherever they've been stationed, because they educated themselves about how to buy a home they could rent out for the amount of the mortgage payment or more.
Each of their properties just broke even and didn't net them any additional cash flow over the years. But when they retire at the end of 20 years, they own 4 homes in different areas of the country, worth more than half a million dollars (that's an average of $125,000 per house, which is probably low), with equity of tens of thousands of dollars. They decide to sell one of the homes and use the equity in it as a down payment for their new retirement home. They continue to own the other three, while their tenants continue to pay for them. In just a few more years, the mortgages on those rental homes start to be paid off, one by one, and that rent amount then becomes additional retirement income to supplement their military retired pay.
This is one time when keeping up with the Joneses might be a good idea.
Transferred to the Same Area Several Times?
Is it possible that you might be transferred in and out of the same area several times during your military career? If so, you may want to buy a home there, and plan to rent it to other military families when you are stationed elsewhere. Many military families do this with homes in the Washington, D.C. area.
You'll continue to enjoy the tax savings and your equity will continue to grow, while someone else is making your payments for you. And when you're transferred back to that location, you'll be able to move back into your own home, without having to worry about finding a new one (assuming, of course, that you've coordinated with your renters, and the home will be vacant and available for you. If not, you may have to rent for a few months until your tenants' lease expires and you can move back into your own home.)
So, there are a number of factors to consider when deciding whether to rent or buy a home, but owning your home can be one of the best decisions military families can make. Don't cheat yourself out of potentially hundreds of thousands of dollars without learning more about the benefits of buying a home.
If you have questions you'd like to ask about your situation, please scroll down to the form and post them here. We'll try to help you evaluate the various factors to consider in deciding whether to rent or buy a home. And we invite other readers to pay it forward by helping us answer your questions, and by sharing their stories (good and bad) about their experiences with renting vs. buying a home.
We have a knowledgeable friend who can help you navigate the unfamiliar territory of mortgages and home buying.
Kate Ford is a real estate and mortgage insider. During the last 20 years, Kate has helped people with affordable mortgage financing, and has originated numerous VA loans for active military and retired veterans.
When Kate retired, she decided to share the knowledge and experience she gained over the past two decades online, where she presents the information you need, totally free of charge.
We invite you to visit her website, where you'll find many useful tips, including ...
Determining Mortgage Affordability - How not to get caught in the trap of allowing a lender to determine if you can afford a certain monthly payment.
Should I Rent or Buy?
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