A Buy vs. Rent Guide for Military Families
Real estate website, Trulia, reported this week that rental amounts across the United States raised an average of 5.4% over the last 12 months. The demand for rental properties from homeowners who were displaced due to foreclosure or those unable to qualify to buy a home, account for the steep increase. While Trulia also reports that home prices are starting to rise, they pale in comparison at 0.3% over the same 12 months.
With record low mortgage interest rates and home prices, should military service members who have dreamed of owing their own home, jump into the real estate market?
Because frequent relocation is part of the military landscape, many military service members have shied away from investing in a home. However, discuss this idea with enough people and you will find that there are definitely two sides of this camp.
As mentioned in previous posts, my husband and I were advised by a savvy friend of ours to invest in real estate at each installation we lived at and we have followed this advice for the last 17 years. Now with 4 homes, we hope that we have made a sound investment in our future. We carefully considered each home purchase based on the location, price, upkeep, payment, and whether or not we would be able to rent it easily and still cover our expenses. With the opportunity to secure a VA mortgage and the benefit of a monthly housing allowance, we embarked on this long-term investment strategy. While it has worked for us, certainly many aspects of this endeavor warrant special consideration.
Rich Novak, USAA Assistant Vice President Home Circle Integrated Solutions, explains that they urge their members to first consider how long they may live in that particular area. If it is 3-5 years, or if they plan to return for retirement, then they advise that it may be worth purchasing a home. However, Novak says that it is also important to factor in the cost for maintenance as well as the expenses incurred when it comes time to sell the home.
In an article published by USAA, members were encouraged to keep their housing costs below 30% of their total income, excluding their military housing allowance. When asked about the reasoning behind advising their members to eliminate their housing allowance from the equation, Novak explained that, “The guideline here is to think about the safety net. On occasion housing allowances do change and particularly if you move away from that duty station. The advantage of not including it is one of those mechanisms you can use to make sure that you are not buying too much home. That way at least if you do move away and you get to a duty station where the housing allowance is lower, there is less immediate concern that that drop in your paycheck will negatively impact your ability to make the house payment at the last post”.
With the abundance of available homes and historically low prices and interest rates, it certainly poses a rare opportunity for individuals who were unable to afford the previous market to purchase a home now.
While Novak agrees with this perspective, he cautions that, “There is an interesting confluence of historical low interest rates and a depressed housing market that makes it look appealing, but one of the things with real estate is that it is very local, so it is hard to make general statements. The real estate market in Texas, for example, has been very different from what has happened in California. And even within California you will see different markets, so you really do have to know the local market. Typically and historically, interest rates and home values have moved opposite of one another. Meaning that when interest rates are low, typically home values are higher and as interest rates go up, home value appreciation would typically stagnate. It really comes down to affordability and how much monthly payment people can really afford, so the combination of the value of the home and the cost of the financing would bring themselves into equilibrium. It is unique right now, with the financial crisis, where you have both home values and interest rates being low. One of the things you have to consider is that buying now, you get low financing costs, but as interest rates creep up, as most economists expect of the next few years, that may also keep a little bit of a lid on home value appreciation”.
An additional benefit that many may not consider when purchasing a home is the opportunity to utilize the investment as a tax write off. I asked Novak if this aspect of homeownership is something that military service members should factor into their decision.
“It is important to crunch all of the numbers together, because what you will find is that over the long term, particularly with a fixed rate mortgage, if you are going to be in the home for a while, owning can be actually end up being more valuable than renting. Again, this pre-supposes that the house will at least keep its value and that has been the challenge in the last few years. In the past you could always count on your home value increasing, if even just a little bit, but you certainly did not expect it to be less. In general, when you look at the cost of owning vs. renting, over the long term the cost of owning may initially be higher, but over time, as your rent continues to increase and your fixed rate mortgage would have the same principal and interest payment, they sort of flip-flop at some stage. And then of course, with home ownership, you typically are building equity in the property, so your net worth would increase over time. So it is very important to run those numbers. But typically in the short run, when you are looking at only owning the home for 2-3 years, it is not necessarily going to work out that way. You really end up, in most cases, needing to own that property for a longer period”.
Neighborhoods surrounding military installations have the benefit of a stimulated rental market and now with the increased need for rental homes, it would appear that purchasing a home near your current duty station could turn into a sound investment property if you are willing to take on the responsibilities of being a landlord. But Novak cautions their members to “look at the health of the rental market in that area. The challenge with that, to some degree, is with BRAC moves and other elements. Question whether that post will still be as large as it is in the future. It can work both ways in that it could become larger, but again depending on where you are, it adds an element of risk to it. You have areas like San Diego and Washington DC that have a strong military presence but also have other government agencies and businesses that diversify that economy”.
Military life is complex with unexpected twist and turns which can make coming up with a plan or life strategy difficult, if not impossible. If you are trying to make the decision between buying a home and renting at your next duty station, take the time to weigh the various options. Crunching the numbers and hypothesizing the diverse paths your life may take will likely lead you to a sound decision that will put your mind and financial future at ease.
Rich Novak joined USAA Federal Savings Bank in March 2008 to lead Real Estate Product Management. Rich has nearly 20 years of experience in the Real Estate finance industry including stints at secondary market agencies Ginnie Mae and Fannie Mae. Rich’s most recent experience prior to USAA was with Wells Fargo Home Mortgage's eBusiness Capabilities team serving as the Vice President.
Rich graduated from Syracuse University where he was involved in the Army ROTC program and also has an MBA from George Mason University.
As a former Scout Helicopter Pilot in the Maryland Army National Guard, Rich has been a USAA Member for nearly 20 years.
For an additional perspective on military home ownership, please read our article, “Home Ownership for Military Families, Yes or No?”