Help a Reader: Military House Options

Here's an email I recently received from a reader:

My wife and I are both 28.  We have no kids but in 2-3 years will have our first and eventually hope to have 3.  My wife will be a stay at home mom.  We are currently stationed in the DC area.  Being in the military we will be moving around every 2-3 years but there is a high likelihood of coming back to this area for later assignments.  My biggest goals right now are making it to a 20 year retirement (I have 15.5 more to go) and owning a house outright when I retire, whether that means making payments for the next 15 years or saving for an all cash purchase as I retire.  We will more than likely not retire in the DC area but that could change 15 years from now.  Also, as with every other job out there, a 20+ year career is not a guarantee but it is my goal.

• Income: ~$100K/year (~$80K is my income, ~$20K is my wife's income. My income should continue to go up with pay raises and promotions so that by the time we have kids and my wife stops working we will be in the ~$100K range again)
• Expenses: ~$50K/year (~$1500/month rent, $1,000/month tithing, $750/month food/gas and $750/month taxes/utilities)
• Retirement Funding: $26,500/year (full maxes for my TSP but no match, my Roth IRA and my wife's Roth IRA)
• Debt: ~$1,100 for a truck that will be paid off by end of August
• Retirement Funds: ~$80,000 (~$55,000 in my TSP, ~$20,000 in my Roth IRA, ~$5,000 in my wife's Roth IRA)
• Savings: ~$21,500 in taxable mutual fund specifically for a house
• Emergency Fund: essentially zero (had to use the $2,000 to go to a funeral earlier this year)
• ~$2,000/month left over for savings goals

Financial goals:

1) Continue maxing out retirement funds NON-NEGOTIABLE

2) Build up emergency savings to $20,000

3) Begin regular savings plan for house fund or contribute towards mortgage for next 15 years

Housing options:

1) Continue saving on our own until we have a sufficient emergency fund and a significant housing fund to buy outright

2) Buy something cheap now on a 15yr loan ($150,000-200,000 for $1,128-1,504/month at 4.25%) and then rent out when we move; own outright when we retire

3) Buy something expensive now on a 30 yr loan ($300,000-400,000 for $1,610-2,147 at 5%) and rent out when we move; sell when we retire if market appreciates

What is your advice for him (in particular -- which of the house options should he pursue)?

Comments

[billbill]

There are too many unknowns in the future to tie your income (especially the bigger house) for 10 years. Also being a landlord from far away is probably more of a hastle than it is worth. I would stick with renting and see where life takes you.

[rich]

It is unlikely you will find a house suitable in the DC area for 150k-200k. I live in this area, and we live in a foreclosure, that needed a lot of work, and it cost us 291k in a more reasonable nieghborhood. I do suggest to get yourself a property in this area, but plan on the 300k plus price of it.

[Tyler]

If I'm not mistaken, military personal have access to cheap money to purchase homes, so you shouldnt feel a huge rush to lock in a cheap capital. You're going to move in the next few years. You plan to begin a family soon. DC was one of the hottest markets in the country. Why dont you wait on the purchase of a home? What's the rush?

Rent a place for the next few years. Move, have the kids, revisit buying at that time. You dont have to own a home to financially stable.

[Bad_Brad]

This is just my feeling, but I personally hate the idea of being a landlord from a distance. All it takes is one nightmare tenant to basically ruin your property and severely damage you financially. You are also at risk of vacancy (I have no idea what the vacancy rates are in the DC area) as well as major maintenance problems as time goes on (HVAC, roof, windows, electrical, plumbing - do I really need to go on?)

Given your circumstance of moving every 2 to 3 years, I would say you are an excellent candidate to be a permanent renter. It just doesn't make sense to incur the transaction costs to buy and sell a house if you know upfront that you are only going to be living there for 2 to 3 years.

[jim]

"Being in the military we will be moving around every 2-3 years"

If you expect to be moving every 2-3 years then I would NOT buy but would just rent instead. Moving that frequently makes buying/selling homes impractical. You'll do better by renting your home and saving your cash.

You talk about buying a place and renting it out after you move. Have you been a landlord before? Do you really *want* to be a landlord and do you realize what it can entail and the risks? How do you handle unpaid rent, vacancies, broken water pipes, a tenant who smokes or has a dog against your rules, a broken down furnace on Christmas day, etc? Being a remote landlord makes it all a lot harder. If you pay a manager then you're losing 10% of the rent and you have to trust the manager will do a decent job as well and they don't always. Owing rental property can be a great investment if you're inclined and suited to be a landlord. I would NOT invest in rentals in another state, remote management is too much of a pain. (I speak from experience)

[MSC]

Continue to rent, live modestly, save as much as you can, and live without the stress of being a landlord or trying to time the real estate market when you don't know where you'll be posted in 2-3 years.

[Budgeting in the Fun Stuff]

I'd just continue saving to buy a house outright since I'd never want a mortgage if I wasn't sure where I'd be living all the time. You're doing great, good luck with whatever decision you make!

[Easychange]

Rent until you plan to live somewhere stable. If you are worred about participating in the run up of housing prices over the next few years, look in to mutual funds that get some exposure. And be sure to guard against inflation. It really matters as the sum gets larger than what you can save each year.

[bearinator]

I am in a similar situation and also currently live in the DC area. We have decided to rent until the moves stop, at a minimum. Save that money, invest it -- just not in a house. You will also be in a much safer situation, financially, with lots of liquid assets instead of a house that may or may not appreciate and may or may not sell.

Even if I were staying in DC, I wouldn't buy. I believe the market is still overpriced (price to rent ratio indicates renting is still the better deal).

[Mark]

I agree with most of my posters--why are you in such a rush to buy a house? Geez, haven't you been watching what has happened with all the borrower fraud in the housing market? Housing prices along the coast are still too inflated, mainly because of the government's massive intervention in the housing market helping to prop up prices. You're a fool if you buy now. Why do you think it is a good time to buy? In many areas (in coastal Cal, for instance) housing prices are still more than double what they were in 2000. Do you think that really is a good deal?

Wait for the backlog of foreclosures to hit the market, and less government intervention--then prices will be more in line with historical averages.

[dogatemyfinances]

You really want your wife to be a long distance landlord when you get moved and then you get put on some kind of assignment???

The better question is why doesn't she have a better job? Only 20K? Why not get her some skills and a career, then it would be easy to buy.

[Don Current]

Wow! FIrst of all... Don't stop what you are doing!! You are rocking it dude! Way to go! I can't believe nobody else has commented on that! You've got a plan and you are working it. Good for you. Wish everyone I worked with were as smart as you and getting it right at such a young age too. You WILL be successful. No doubt.

Now, for the advice. I agree totally with those saying wait. I think your plan should be to continue to rent while paying yourself a mortgage payment until you retire. I would suggest investing that in a good diversified balance of mutual funds so that you get a good return on your money over that 15.5 years.

You've got the right idea though, first get that emergency fund in place. Keep that in a money market fund so it is ready and available as the need arises. Once that is in place, begin to fund that mutual fund.

Assuming you were to get that emergency fund in place over the next year and then giving yourself 14 years of investing $1000 per month for that time period, you would have about $364,000 at that point to purchase a home. That's assuming a 10% rate of return which is what the stock market typically averages over any 10 year period. If we happened to be in a slump at that point, you might have to purchase something lesser, or maybe wait it out a couple of years for an upswing.

Keep it up man. God Bless!

[Marty]

Being a Sailor for the past 25 years, I can tell you there are a lot of pros and cons with this housing issue. I know several people whom were very successful buying homes at every duty station they went, holding for a while and seling and others that didn't do well at all. I have 3 very good friends that are millionairs now because of it. They were lucky, bought and sold at the right times. I never had the desire to do it. I went the "buy and sell" when I move route, made a little and have saved money to buy another home when I retire.

Being a "long distance" landlord is not that difficult. There are many realors willing to be the landlord for 5-10 percent of the rent. You just need money in the bank to pay for the repairs that will come up, and they will come up.

Bottom line. I am happy the way I did it. I felt much more comfortable with myself and finances.

By the way, you are on a great road to success with only 5.5 years in. Keep up that good work. 20 years goes by very fast.

[Jeffinwesternwa]

I've rented wonderful homes owned by military members "stuck" across the country. Do yourself a favor, RENT and invest the differnce, you get a housing allowance to do just so. You will get burned being a short term owner in a typical and bad housing market. Too many costs to buy/sell plus being an absentee landlord when rents don't nearly cover all ownership/landlord costs aen't worth the headache! Take my advice, I am the RETIRED @ 47 (retired USAF officer too) "millionaire next door" doing just what I said....

[Arimack]

I am a military officer living just outside the DC area in Maryland. We bought a home when we moved here a year ago. I am on the other side of the spectrum from you as I have 18+ years in. The rush is something that is understandable if you are in the military. One thing those outside the military do not consider is the timing of housing for military members is not always conducive to where you are located by the military. You may be in a better position to buy in four years yet you could be stationed in Germany or Korea and unable to buy. My wife and I were ready to buy six years ago but were living in Germany, followed by a short stateside tour, then back to Germany. We find ourselves approaching the end of twenty years in the military with very little equity because we waited so long and did not have the opportunity when we were ready. Buy when you can in places where the market will sustain (those bases that are unlikely to close in the future or those areas -like DC- that are stable without the military). My advice is this:

1. Keep saving like you are. You are doing well and it is a good pace you are setting for yourself.

2. Buy when you can. One difference from your plan is to consider renting it permanently once you leave. Even if you move back to DC keep renting it. This way if you buy what you need now, a two bedroom place, it will be perfectly aimed at young couples. It does not need to include your future need for additional bedrooms for kids.

3. I have several friends who have done what you are proposing. One thing to keep in mind is you will need to have significant set asides to improve the house if you move back in. Almost all of my friends have had to do major renovations or repairs to the property before they moved back in after renting it for long term periods.

4. Buy for the future if you can. This is the converse of number 2 adove. IF you want to move back in then you need to plan for the kids. School district, size of the yard, nearness of parks, number of bedrooms and bathhrooms are critical to your planning. Don't buy a two bedroom if your are planning on three kids and moving back in!

5. Don't force it. DC is a great place to buy but only if you can afford it. It is extremely expensive. If it breaks your budget then it will defeat the purpose. Make sure your estimates include the property not renting for several months each year. Plan in a major maintenance expense for it each year. Budget for the rental management fees. Also calculate your time in it (do you have 3 years, 2 years or less?) How stable is your current assignment? Will you be focused on the Pentagon, Ft Belvoir, Andrews, Ft Meade, etc? Something to think about is DC is not your normal commuting location and just because you are now working at the Pentagon, if your return asignment is to Meade the house location could be an issue.

6. Research about the VA Loan and decide if this is the house you want to use it on, if you have to. You can reuse it if you pay off your first loan but there are significant fees to reusing it.

7. Keep in mind, may people do not like living in "their" home after renters have been in it. Need to ask yourself and your wife this hard question before you buy. Will you be okay moving back into your home after 3 or 4 other families have been in it?

Bottom line, I agree with your three options with the caveats and only you can decide which is right for your family:

-Buy a smaller house that you will rent when you leave and then keep renting.
-Buy a house that you will be able to live in with a family in the future and rent when you leave, moving back in whenever you return to the DC area.
-Continue to rent now and look for the next opportunity to buy at your next duty station.

With the costs of DC I think the small house or continuing to rent might be your only affordable options. You could look to the outskirts of DC and commute (there are people in my neighborhood who get up at 4AM to drive into DC everyday just so there family can live in a nice affordable house) but this is tough and I would not recommend it. I have many friends who have bought at almost every PCS with an eye to buying rental properties (few who buy for their future selves -the retirement home- have been successful) and been wildly successful at it. With a good rental management hired to support you it is doable. You need to plan for the headaches that will come up but if you can deal with it it is worth it.
Good luck with your decision.

[ParatrooperJJ]

I'd like to know where he gets his $100,000 figure from...

[Old Limey]

The inquiring reader would be well advised to take the advice of Arimack.

It is not often that one encounters such a well thought out, exceptionally well written, and very knowledgeable reply that is totally applicable to the question raised.
Since they both live in the same area and are both in the military I would think it would be most helpful if, with the assistance of FMF, that they could be put into e-mail contact with each other.

[FMF]

FYI, I'm willing to do what Old Limey suggests (put you two in contact with each other) if you are both willing. If you are, email me and I'll do the introduction.

[Arimack]

Old Limey, thanks for the kind words. FMF I have sent you an email. Happy to help.

[JT]

Thank you all for your comments and suggestions. My wife and I agree with the general undertone of the responses that renting and saving is the best way to go. It provides us with the most stability/security while also offering a fair amount of flexibility.

FMF - I would greatly appreciate being put in contact with Arimack. I have sent you an email.