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Should Military Families & Active Duty Members Buy a House or Rent?

According to a 2016 report by the Rand Corp., the Department of Defense moves about one-third of all military service members each year in a process known as permanent change of station (PCS). According to the United States General Accounting Office, the average service member undergoes PCS once every two years — once in an initial four-year enlistment term or nine to 13 times in a 20- to 30-year period for enlistees who “go career.” (Career service members are generally required to retire after 30 years of service.)

PCS relocations include moves to on- or off-base housing inside and outside the continental U.S. For service members who are both eligible for housing in on-base barracks and who prefer this arrangement, the housing component of PCS is straightforward. Depending on rank and length of service, service members ineligible for barracks housing or who prefer different living arrangements can typically choose from a variety of on-base housing configurations (such as dormitory- or apartment-style housing) or use a stipend known as a basic allowance for housing (BAH) to subsidize the cost of off-base housing.

Not all service members are eligible to live off-base. For those fortunate enough to have the option, each PCS brings with it a significant decision most nonmilitary folks only have to make once in a great while: whether to rent or buy.

This decision presents a host of financial, personal, and practical considerations, and the correct course of action isn’t always clear. Service members looking ahead to their next PCS need to take all of these considerations into account — and be sensitive to any changes in their finances, personal lives, or long-term plans that could influence the decision.

Financial Considerations: Cost of Homeownership & Potential Return on Investment

One set of considerations centers on the relative cost of renting or buying and, if you choose to do the latter, your expected return on investment during your tenure as a homeowner.

How Does the Local Cost of Homeownership Compare to Prevailing Rents?

A direct cost comparison is the most straightforward way to evaluate the financial consequences of buying a house on your next PCS.

If it’s going to cost more to buy a house or condo than to rent an apartment for the duration of your stay, you should rent. If your expected cumulative rent payments exceed your total expected cost of homeownership for the duration, you should buy.

On closer inspection, this calculation isn’t as simple as it sounds. Homeownership costs more than your monthly escrow payment — the single payment that typically includes your principal plus interest, insurance, property taxes, and sometimes homeowners’ association fees. It also includes your mortgage closing costs and down payment (unless you opt for a no-down-payment loan) and ongoing home maintenance costs, which a very rough rule of thumb pegs at about 1% of the home’s market value each year.

Add all these costs together over the total length of time you expect to remain at the station, expressed in months. A common length of station for service members in the contiguous U.S. (CONUS) is 36 months, so we can use that to illustrate how this calculation works:

Total cost of homeownership = closing costs + down payment + (monthly escrow payment x 36) + (monthly home maintenance costs x 36)

Compare this result against the sum of your expected rent payments over the same period (this calculation assumes you fully recoup your security deposit):

Total cost of renting = monthly rent x 36

One complicating factor, of course, is the condition of the local housing market. If home prices are appreciating steadily around the base, it’s possible you can sell your home for a gain when you move on, even accounting for agent commissions and any seller-paid closing costs.

But you shouldn’t bank on that. If you’re unable to extend your station and move on after just two or three years, you could just as easily sell for a loss. For now, this straight, apples-to-apples comparison of the relative costs of renting versus owning is the best way to get a ballpark sense of which makes more sense financially without undue speculation.

Pro tip: If you decide purchasing a home is the best move, start your mortgage search with loanDepot. With a VA loan through loanDepot, you could purchase your home with no down payment and a great interest rate.

How Big Is Your Household?

As you can imagine, your calculus is heavily dependent on your family situation. If you’re a single person with simple tastes, renting is far more likely to be a better deal financially, as monthly rent on a basic studio apartment typically costs less than the monthly cost of owning a starter home. If you have a spouse and multiple children, you need a two-bedroom apartment (at minimum) to feel comfortable. That could be pricier than a modest owner-occupied home, especially with a minimal or nonexistent down payment.

Can You Afford to Buy a Move-in-Ready Home?

To each their own, but if you expect to change stations again in a few years anyway, you probably don’t want the headache of buying and improving a fixer-upper. You might not even have the patience for an older home in reasonably good condition, given the likelihood of costly repairs or upgrades during your stay. In expensive real estate markets, the price difference between older fixer-uppers and newer, move-in-ready homes can be steep — perhaps pricing you out of the category altogether unless you’re willing to endure a long commute or settle for less space than you’d like.

But rental housing is by definition move-in-ready and doesn’t obligate the occupant to make necessary repairs or improvements. If it also happens to be cheaper, the choice is easy.

How Marketable Is the Property?

Even if the cumulative cost of buying is less than that of renting, you need to consider the upfront cost, investment of time and effort, and likely financial payoff associated with selling the property.

Generally, sellers pay 6% of the total selling price in commission to the buyer’s and seller’s agents. That said, it’s easier these days to find agents willing to discount their commissions or to sell without an agent with minimal out-of-pocket expense.

Also, even in seller’s markets, where buyers snap up houses within days or weeks rather than months, the process of preparing, listing, and marketing a home takes months. For military families preparing for a cross-country or international move, those same months are often hectic, and even projects as important as selling a house can take a back seat to more immediate concerns. And there’s no guarantee the home will sell by your move-out date. A seller’s market is no panacea, as property-specific issues — unusual layout, maintenance issues, or home improvements that decrease resale value — keep buyers at bay everywhere.

Finally, military bases are reliable employers, so housing markets nearby tend to be stable. That’s a good thing for your chances of breaking even on the deal — if your home’s value appreciates by 2% per year and you move after three years, you can make back your agent commissions on the sale. If the market is hotter than that, you can actually make a profit. But the reverse is also true. Off-base towns aren’t immune from nationwide recessions or housing market contractions.

Are You a Good Candidate for a VA Home Loan?

If you’re an active-duty member of the U.S. military, you should qualify for a VA home loan that allows you to purchase a primary residence with no down payment. VA loans typically have more lenient underwriting standards as well. VA loan eligibility makes homeownership a lot more attractive for service members without excellent credit and tens of thousands of dollars in liquid savings.

VA loans come with significant drawbacks, however. These include financial downsides, such as the funding fee (over 2% of the loan principal for loans with sub-5% down payments) and a strict limit of one loan at a time. This second requirement is a big sticking point for service members who’d like to keep their old house as a rental property after a change of station — forcing them to come up with the cash to pay off the mortgage (often a tall order) or abandon their rental dreams.

Is It Feasible to Maintain the House as a Rental After a Change of Station?

If you can afford to hold onto your house following a change of station and you’re willing to assume the responsibility of owning a rental property, renting out your off-base home can produce a steady stream of (mostly) passive income.

Due to high resident turnover and the temporary nature of military tours, rental markets near major installations tend to be both lively and stable. With regular maintenance and effective marketing, it’s typically easy to find plenty of service members eager to lease your place.

The catch is that you need a local property manager to take tenant calls, handle necessary upkeep and repairs, and arrange professional service for tougher fixes. A local friend or relative might be willing to manage your property for less than the going rate, which typically ranges from 5% to 10% of gross rent. But they’re unlikely to willingly drag themselves out of bed at 2am without demanding some compensation in return.

Management costs factor into the other important consideration about maintaining your off-base home as a rental: return on investment and, specifically, return on equity (ROE). In simple terms, your return on equity is your return on net assets — so, for landlords, the net return (gross rents minus net expenses) over net equity (total property value minus the outstanding mortgage balance).

Financially speaking, small-time landlords should aim to achieve ROE higher than the historical long-term rate of return on broad stock market indices. That’s anywhere from 7% to 10%, depending on the time frame and index.

Being a landlord does offer a host of short-term tax benefits. Most rental expenses are deductible, including big-ticket items like mortgage interest, property taxes, and depreciation. And many landlords end up with little or no taxable income — or even a tax loss that reduces their overall income tax burden.

However, the loss of the capital gains exclusion on the sale of a primary residence can easily swamp these benefits. A landlord who doesn’t use their rental property as a primary residence for at least two out of five years immediately preceding its sale becomes ineligible for the exclusion, which is $250,000 in capital gains for single filers and $500,000 for married joint filers. For example, a married couple who nets $550,000 on the sale of a qualifying primary residence pays capital gains taxes on proceeds of only $50,000. Without the capital gains exclusion, the same sale incurs capital gains taxes on the full $550,000, raising the couple’s tax bill by nearly $75,000 in the sale year (assuming a 15% tax rate on capital gains).

The capital gains exclusion strongly incentivizes homeowners-turned-landlords to do one of the following: sell their former primary residences no more than three years after moving or hold onto the property long enough for the combination of rental income and value appreciation to offset the hit from the loss of the exclusion. For those in the latter group, predicting the future breakeven point is not an exact science, as much depends on the long-term performance of the local housing market.


Practical & Personal Considerations: Is Homeownership Right for Your Situation?

Practical and personal considerations also influence your decision to rent or buy on your next tour. Even if buying a home makes sense financially, it might not be the best move for you personally.

Do You Have a Local Support Network?

If you have a decent-size network of friends or family living near your next station, it’s reasonable to assume you’ll have an easier time adjusting to life there and that you’ll be more inclined to request an extension of your tour (rather than jump on the opportunity to move when your next PCS orders come down). If nothing else, on a purely practical level, a supply of trusted local contacts willing to look after a left-behind rental property can alleviate concerns about buying and holding for the long haul.

Do You Plan to Request a Change of Station for Any Other Reason?

If you expect to request a change of station (or have ruled out requesting an extension of your current tour) for career or personal reasons, you’re probably less inclined to go through the trouble of buying (and then selling) a house or condo you won’t live in for very long. Renting involves far less commitment, even if you have to break your lease (which you can generally do without penalty after receiving deployment or change-of-station orders that will last at least 90 days).

Can You See Yourself Retiring in the Area?

Upstate New York is beautiful, but let’s be honest: The area around Fort Drum, New York, does not draw sun-seeking retirees like San Diego or Tucson, both of which feature sizable military installations in or near the urban core.

If you’re fortunate enough to find yourself stationed in a retiree-friendly place at some point during your military career, your incentive to buy and hold a home there is far higher than in a station where you can’t see yourself living out your later years. With steady rental income, decades of timely mortgage payments, and (fingers crossed) steady property value appreciation in your adopted home, your property could produce a tidy return on investment — and could be yours free and clear by the time you’re ready to retire.

Are You Ready for the Responsibilities of Homeownership?

This concern isn’t unique to military service members, of course. No matter your profession, homeownership is a big responsibility. When the toilet stops working over the weekend, it’s on you to attempt a DIY plumbing fix or eat the cost of an emergency repair call — or both, if you’re not up to the job. If you’d rather not deal with the expense, effort, and stress of full responsibility for your domain, perhaps it’s best to put off buying a house.


Final Word

Deciding whether to buy a house or continue renting is challenging enough for civilians with stable jobs and no plans to move across state lines soon.

For military service members all but certain to change stations within a few years, it’s a much tougher call. Buying a house near your current station can be an excellent investment that produces stable rental income for years after you move and waits for you if and when you choose to return in retirement. It can also be a costly mistake that creates more hassle than it alleviates.

You won’t know for sure until it’s too late. The best you can do is to carefully weigh your options and make the decision that seems best at the moment.

Are you currently enlisted in the U.S. military? Do you own or rent your home?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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