Personal Finance

Can I Rent Only To Military

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 10 minute read

Third of all military personnel undergo PCS transfers annually, according to a 2016 Rand Corp. analysis (PCS). The United States Government Accountability Office reports that PCS occurs on average once every two years among active-duty military members, once during an initial four-year enlistment term, and nine to thirteen times throughout a 20- to 30-year enlistment tenure among “career” enlistees. (Members of the armed forces who have served for 30 years are often compelled to retire.)

Moving to a new residence on or off base, inside or outside the United States proper, is all part of a Permanent Change of Station. The PCS housing process is simple for service personnel who are qualified for and interested in living in on-base quarters. Those military members who are not eligible for barracks housing or who prefer alternative living arrangements have the option of a variety of on-base housing configurations (such as dormitory- or apartment-style housing) or using a stipend known as a basic allowance for housing (BAH) to subsidize the cost of off-base housing.

Members of the military are not necessarily permitted to reside off-base. Those lucky enough to have the opportunity to rent or buy a home at each PCS are faced with a dilemma that most civilians only face seldom.

The best course of action isn’t always obvious, as there are many financial, personal, and practical factors to consider. A service member planning their next PCS must give careful thought to all of these factors, as well as any recent or upcoming changes in their financial situation, personal life, or long-term goals, which may affect their choice.

Financial Considerations: Homeownership Costs and Potential Return on Investment

One set of factors to think about is the price difference between renting and purchasing, as well as the projected return on investment from owning vs renting over the course of your lifetime.

How Do Local Homeownership Costs Compare to Current Rents?

The simplest obvious approach to assess the financial impact of buying a home during a PCS is to compare the costs involved.

If the monthly cost of renting an apartment is less than the mortgage payment on a house or condominium would be during your stay, then renting is the better financial choice. If your monthly rent is going to add up to more than the price of a home over that time period, you should probably purchase.

This computation isn’t as straightforward as it first appears. When you buy a house, you incur expenses beyond your monthly escrow payment, which is the sum of your principle, interest, insurance, taxes, and (perhaps) HOA dues. Included in this sum are not only the down payment and mortgage closing expenses (unless you choose for a no-down-payment loan), but also the annual maintenance expenditures of around 1% of the home’s market value.

Sum up all of these expenditures across the whole number of months that you anticipate spending at the station. As an example, let’s say that a service member’s typical tour of duty in the continental United States (CONUS) lasts 36 months.

Closing expenses + down payment + (monthly escrow payment x 36) + (total interest rate) Equals total cost of homeownership (monthly home maintenance costs x 36). Check this number against the total amount of rent you anticipate paying over the same time frame (this calculation assumes you get your security deposit back in full):

  • Total cost of renting = monthly rent x 36

Of course, the local housing market’s current state is a complicated aspect. Even after factoring in real estate agency charges and any seller-paid closing expenses, you may be able to make a profit on the sale of your house if prices have been rising continuously around their base.

Not that you should count on it, though. It is possible to sell at a loss if you are unable to sell your station after only two or three years. For the time being, this side-by-side comparison of the prices of renting and buying is the most reliable approach to obtain a rough idea of which is more financially sensible without resorting to unnecessary guesswork.

How Big Is Your Family?

Your math obviously depends on your family dynamics. Monthly rent on a basic studio apartment is often cheaper than the monthly cost of purchasing a starting house, making renting a far more probable better bargain financially if you are a single person with simple tastes.

A two-bedroom apartment is required (at a bare minimum) for a family with a spouse and more than one child. That could be more expensive than a starter house for an owner-occupant, especially if the down payment is small or nonexistent.

Are You Able to Afford a Move-in-Ready Home?

Everyone has their own preferences, but if you know you’ll be moving again in a few years, a fixer-upper may not be worth the hassle. Given the potential for expensive repairs or renovations during your stay, you may not even be willing to settle for an older property that is in decent shape.

The price gap between older fixer-uppers and newer, move-in-ready houses may be substantial in competitive housing markets, potentially pricing you out of the category altogether unless you’re prepared to put up with a lengthy commute or make up with less room than you’d want.

On the other hand, rented dwellings are always in “move-in” condition and never need tenants to do any upgrades or fixes. If it’s less expensive, too, then it’s an easy call.

What is the property’s marketability?

Consider the initial outlay, the time and effort required to sell the property, and the potential return on investment even if the total cost of buying is less than the cost of renting. The standard commission split between a seller’s agent and a buyer’s agent is 6%. Nonetheless, it is simpler to discover agents who are ready to reduce their commissions or to sell without an agent at low cost.

It takes months to get a house ready to list, photographed, and advertised, even in a seller’s market when buyers might close in a matter of days or weeks. The months leading up to a long-distance or overseas transfer may be very chaotic for military families, to the point that even major tasks like selling a home are put on the back burner.

There’s also no assurance that the house will sell before you have to vacate it. Even in a seller’s market, purchasers might be hard to come by because of quirks unique to a given home, such as an odd layout, maintenance problems, or renovations that lower the home’s resale value.

Last but not least, because military bases are consistent places of employment, local property markets are usually steady. That bodes well for your prospects of making a profit on the transaction; if the value of your property rises by 2% annually and you sell it after three years, you’ll have made back the money you spent on real estate agent commissions.

To generate a profit, the market needs to be far hotter than that. However, the inverse is also true. Off-base communities are not spared the effects of national economic downturns or falls in the property market.

Are You Eligible for a VA Home Loan?

Veterans Affairs (VA) loans can be used by active-duty service members to buy a property with no money down. The underwriting requirements for VA loans are also often less stringent. Military personnel who haven’t established themselves financially yet may qualify for a VA loan may find the prospect of homeownership much more enticing than it would otherwise be.

However, there are major downsides to VA loans. There are monetary drawbacks, such as the financing cost (which may be over 2% of the loan principal for loans with down payments below 5%) and the restriction to a single loan at a time.

Having to come up with the funds to pay off the mortgage (sometimes a tall order) is a major roadblock for military personnel who would like to maintain their previous residence as a rental property after a change of station.

Is it possible to keep the house as a rental after relocating?

If you have the financial means to keep your home after a PCS and are prepared to take on the responsibilities of property management, renting out your off-base home can generate a consistent source of (mainly) passive income.

Rental markets on and around large sites are often active and steady, despite the substantial resident turnover that results from the transient nature of military deployments. Most military personnel are willing to lease a well-maintained, well-marketed property.

There is a catch, though: you need a local property manager to field tenant inquiries, oversee routine maintenance and repairs, and coordinate expert assistance for more extensive problems. Typically, property managers are paid between 5 and 10 percent of gross rent, but a friend or family member in the area may be ready to take on the job for less. However, it’s quite improbable that they’ll get up at 2 a.m. without being paid for their time.

The return on investment and, more particularly, the return on equity are two additional factors to think about when renting out your off-base house (ROE). For landlords, the net return (gross rentals minus net costs) over net equity is an example of return on equity (total property value minus the outstanding mortgage balance).

If a small landlord is serious about making money, they should strive for a return on equity (ROE) that is higher than the long-term rate of return on broad stock market indices. That’s a variation of 7%–10%, depending on the period of analysis and index used.

There are a number of temporary tax advantages to becoming a landlord. Mortgage interest, property taxes, and depreciation are just some of the major costs that can be deducted from rental income. And many property owners wind up with no taxable income at all, or even a tax loss that lowers their taxable income.

However, these advantages may be nullified if the homeowner sells their principal house and loses the capital gains exclusion. If a landlord does not live in the home they are renting out for at least two of the five years prior to its sale, they will not be able to take advantage of the exclusion, which is worth $250,000 to single taxpayers and $500,000 to married couples filing jointly.

If a married couple sells their principal house for $550,000 and they have a net profit of $550,000 after expenses, they will only owe capital gains taxes on $50,000. Without the capital gains exemption, the couple would owe taxes on the entire $550,000 (assuming a 15% rate on capital gains) in the year of sale, an increase of roughly $75,000.

For this reason, the capital gains exclusion provides a powerful incentive for homeowners who convert to landlords to either sell their former primary residences within three years of moving or to hold onto the property long enough for the rental income and value appreciation to more than compensate for the loss of the exclusion. Break Even point projections for the second category are more speculative due to the fact that they are tied to the long-term health of the local housing market.

Personal and Practical Considerations: Is Homeownership Appropriate for Your Circumstance?

Both financial and sentimental factors enter into the equation when deciding whether to rent or buy on your next trip. Buying a home may be the prudent thing to do from a monetary standpoint, but it may not be the greatest choice for you.

Do You Have Any Local Support?

It’s realistic to suppose that you’ll have an easier time settling in to your next station and be more likely to ask for a tour extension if you have a sizable support group already established there from your previous assignments (rather than jump on the opportunity to move when your next PCS orders come down).

Concerns about buying and holding for the long term can be allayed by having a network of reliable local contacts who are ready to manage a rental property while the owner is away.

Do you intend to request a station change for any other reason?

The hassle of purchasing and selling a home isn’t worth it if you know you’ll soon be relocating for professional or personal reasons. Unlike buying, renting requires far less dedication (which you can generally do without penalty after receiving deployment or change-of-station orders that will last at least 90 days).

Can You Imagine Retiring in the Area?

Even while the region around Fort Drum, New York, is lovely, it is not as popular with sun-seeking retirees as the cities of San Diego and Tucson, Arizona, which both have significant military facilities.

If you’re lucky enough to spend part of your military career stationed somewhere that’s great for retirees, you’ll be far more likely to make a long-term investment in a house there than you would be at a base where you have no intention of spending your golden years.

After decades of on-time mortgage payments and (hopefully) consistent increase in the value of your adopted home, the rental income from your investment property might generate a nice return on investment, and you might even own it outright by the time you retire.

Are You Prepared for the Duties of Homeownership?

Of course, military personnel aren’t the only ones who have this worry. Being a homeowner is a huge commitment regardless of your occupation. If the toilet stops flushing over the weekend, you are responsible for either fixing it yourself or paying for an emergency plumber to come out and fix it (or both, if you’re not up to the task).

If you’re not ready to take on the burden of owning a home and everything that it entails, financially, physically, and emotionally, then maybe you shouldn’t.

Bottom Line

Civilians with secure employment and no immediate intentions to relocate nonetheless have a difficult time deciding whether to buy a home or continue renting.

This decision is even more complicated for military personnel who are almost guaranteed to undergo a PCS in the next several years. An ideal investment is a home purchased near your present station, which may be rented out for years after you leave and still be there for you when you retire. There’s also the risk of making an expensive error that ends up causing more trouble than it solves.

As usual, you won’t know for sure until it’s too late. Ultimately, all you can do is assess your alternatives as best you can and go with whatever seems like the best course of action at the time.

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