When you’re striving for financial independence, does it really make sense to rent instead of owning your own home?
One of the hidden costs of serving your country is relocating all over the world. The moving process is hard enough: my spouse and I have 19 duty stations between us, and we spent more of our careers outside the continental U.S. than in it. However, the military’s frequent moves also effectively prevent most servicemembers from joining the majority of Americans who own their homes.
Homeownership seems even more tempting when you’re at a large duty station and expect to stay there for a follow-on tour. It’s frustrating, too, if you’re giving up your free money housing allowance to enhance your landlord’s lifestyle instead of building your own equity. And when you can get a VA loan to cover the entire purchase price of your own home, then how could you lose?!?
You homeowners– especially you former homeowners– can see how this temptation might affect your ability to make a good decision.
Author Jane Hodges rented happily for a number of years in big cities and small neighborhoods, but she was also attracted to the idea of owning her own property. In 2004 she was swept up in the real-estate frenzy and bought a home in a marginal neighborhood that was already improving. In 2007 she and her new fiancé decided to sell it and buy another home together, so she took out a large home equity loan (on top of her mortgage) for major renovations. Then she put the house on the market.
You’ve heard this story before, right?
Nope– not that story! Actually, their place was only on the market for a week and they sold for a huge profit. They used their new cash stash to buy the home they’re living in today.
Then Jane wrote the book “Rent vs. Own: A Real Estate Reality Check for Navigating Booms, Busts, and Bad Advice“. I’ve spent a decade on Internet forums debating this perennial topic, and this the most thorough and even-handed discussion that I’ve ever seen.
She starts out with a brief description of one homeowner who ended up severely over-leveraged during the 2008-09 Great Recession because her home and her rental properties lost so much value. She also describes how previous generations of Americans used to buy a property, pay off the mortgage as quickly as possible, and live there for decades– even for the rest of their lives.
Owning a home was “The American Dream”, freed you from the landlord’s indentured servitude, and made you a true citizen. You stayed put where you could work the land and decorate your property any way you wanted. It was also a great investment that led to better communities. Your down payment (and years of mortgage payments) kept you from making other stupid mistakes with your money.
Today, of course, people are (re)learning that renting is much less risky than buying, and may even be cheaper. Americans are much more mobile (especially in the military!) so the ownership costs are higher and it takes longer to build up equity. Renting used to imply a lack of commitment, but now ownership exposes families to more expenses than they realized. Singles want flexibility without being tied to a particular job or location, and married people might need a larger place (in a neighborhood with better schools) when they start a family.
Jane goes on to describe the constant tug-of-war between financial logic and emotional rewards– or, as she states it, “investment versus sentiment”. She goes through the calculations that prospective buyers should consider before they buy, and gives you thumbrules to decide whether it’s better to rent or buy. She describes how to be a sustainable housing consumer by renting when properties are expensive, buying when they’re cheap, saving large down payments, and buying less house than you think you can afford. She offers a concrete way to compare renting expenses to owning expenses. (It’s not just “rent checks” against “mortgage payments”.) All of these tactics offer a margin of safety for catastrophic job losses, unexpected recessions, unpredictable mortgage rates, or other volatility in the housing market.
After you’ve read through the first 75 pages of the debate, she shows you how to be ready for both renting and owning. She digs into the details of credit histories, researching properties, down payments, mortgages, agents, negotiations, and even distressed properties. She takes you not just up to the actual closing but through ownership, maintenance, and repairs–all the way to your graceful exit to another home– whether you’re buying again or renting.
In the last chapter, Jane considers some of the fundamental attitude shifts that have happened during the last five years:
- Renting may be better than owning
- The government should offer less support for mortgage lenders
- Ownership tax breaks might be too generous
- Down payments should be higher
- Homes may be too big for affordable ownership
- Total cost of ownership (not just mortgage payments) should be compared to rental costs.
The book is packed with checklists, summaries of pros & cons, questions to consider, and the stories of other renters & homeowners.
If You’re in the Military, Should You Rent or Own?
This book is especially helpful for military families. It will help you think through whether you prefer to live on base (with its advantages and drawbacks) or out in the community (with a different set of pros & cons). It will help you decide whether to use that housing allowance for risk-free rent or for a leveraged ownership opportunity. It will even help you understand the impact of having to move and the possibility that you won’t be able to sell your home.
I wish this book had been out 30 years ago before I blissfully (ignorantly) bought my condo. (We lost money.) I wish it had been there when my spouse and I bought our first home. (We made money.) I wish we’d read it before jumping on the ownership rollercoaster in Hawaii, where we’ve spent over 20 years verifying that homes appreciate at about the rate of inflation– with wild swings in both directions. We haven’t figured out our graceful exit from Hawaii real estate, so I can’t tell you whether it’s better or worse than the stock market.
If you’re in the military, should you ever buy a house? I vote “No” when you’re on active duty because the risks generally outweigh the rewards. You can do much better by renting (and saving more money to invest in other assets) than by owning and hoping for price appreciation (or an extended stint of landlord duty). Even if you’re a dual-military couple with two housing allowances, I think it’s still better to rent (and save and invest) than to buy more house than you really need.
If you’re in the Reserves/National Guard, or if you’re a veteran, then home ownership might be worth the risk. Have a “financial emergency” plan for a possible pay cut when you’re mobilized. Consider how likely you are to move for career, school, or family. Be ready to stay put for a decade or two, and give yourself a margin of safety: buy less house than you can “afford”, and use a large down payment to avoid being trapped upside-down on a mortgage during a recession. Keep a larger emergency fund for home repairs and, if you’re unemployed, for mortgage payments. You might even consider how much it would cost to get the house ready to sell if you’re surprised by a sudden career relocation.
Whether or not you’re in the military, if you feel that you absolutely must exert control over your property then you’ll probably ignore these cautions and plunge into home ownership. In that case I’d refer you to the most excellent advice I’ve ever read, courtesy of Kate Kashman at Paycheck Chronicles: make sure you can afford the entire cost on top of all your other living expenses. If you’re going to be a homeowner (and possibly a landlord without tenants) then make sure you have enough money for the lifestyle. By the way, Kate prefers to own her homes– and she speaks from experience.
Thanks to The Finance Buff for mentioning this book in one of his 2012 posts. When I put a title on my reading list it can take a few months until I actually get it from the library. Then the post goes into the blog’s “draft hopper” until it’s time for yet another book review. “Rent vs. Own” could be in your public library by now, so try there first.
Real estate: rent or buy?
Five benefits of VA home loans
So you want to be a landlord…
Five retirement strategies that don’t work
Hedging inflation with a mortgage
I completely agree with your advice that military members should not buy a house while on active duty. My husband and I bought a house in Omaha, Nebraska back in 2009. It seemed like a great idea – the $8,000 tax credit was available, home prices were affordable, and we’d thought we would be stationed there for several more years. We found a house for $95,000, our house payment on a 15-year fixed was $585, and we were receiving $1,475 between the two of us in BAH. Just one year later we had PCS orders and had to figure out what to do with the house. We decided to rent it out for the time being and we hope to get orders back to the area after this tour or the next.
If I had to do it all over again, I absolutely would not have purchased a house. It was great while we lived there, but being accidental landlords has been a headache. Our first property management company did not communicate well with us so little problems took weeks to straighten out. Our current property management company is much better but is costing us about twice as much in management fees. Financially, we’re not losing a bunch of money but we haven’t made any either. Our house is 130 years old and has needed a new furnace and water heater (plus a handful of smaller repairs) in the past two years. We would have more money in the bank and no headaches if we just would have rented instead of buying a house. The positive side is that we were smart about buying a house that was well within our budget so it is not a financial burden on us.
You already mentioned the best advice for military members – to make sure you can afford the house even without tenants. My advice is to begin with the end in mind and really think about what you are going to do with the house once you PCS. I wish we would have bought a house that was in an area with more of a demand for rentals – we could have bought a house close to a university or closer to base which probably would have made being landlords more profitable. Also, people should be aware of what home ownership in the military does to you psychologically because it adds an additional factor to consider when thinking about duty stations. Job-wise, Omaha isn’t a great place for us to be stationed, but having a house there is one of the reasons it’s at the top of our dream sheet for assignments.
Thanks, Brandi! Great experience, and exactly the type of advice that inspired this post.
A 130-year-old house… yikes.
I am on the fence between active duty military renting or owning a house. I’ve met folks who were on active duty who bought a house a made a killing once they sold the house…and of course there are stories where the opposite happened and homeowners lost quite a bit.
My wife and I are/were (I am due to retire from the Army) both active duty and bought our first house together outside Fort Knox, KY back in early 2005. We were both convinced it was the right choice with houses being relatively cheap in the area and we can “harness” our dual BAHs to purchase a newly-built 3-bedroom, 2.5 bath house with a huge front and backyard, located in a good school district for our daughter. We knew we were not going to stay there long (we couldn’t visualize us going back to KY let alone retiring there) so we even went with an 5-year ARM (can’t even remember what the terms were as I was deployed to Iraq when my wife finalized the purchase). Fast forward a couple of years, and we received orders to go to Fort Leavenworth, KS for CGSC. The housing bubble was about to burst and there was a glut of houses in the neighborhood due to new construction in anticipation of the Army Human Resources Command’s HQ moving to Fort Knox from DC. We didn’t want to rent out the house (and be long distance landlords) so we put it on the market even before we left for Kansas. Needless to say, the house sat there empty for a good 5-6 months until a buyer made an acceptable offer on the house. Once I tabulated the the costs incurred in buying the house, paying for mortgage on an empty house until it sold, and paying the realtor, we came out about $300 ahead…pretty much broke even on the deal which we were very grateful for. Good thing we were not enticed to buy a bigger house than we were comfortable with from a financial standpoint.
When we were reassigned to Hawaii over 3 years ago, we knew we wanted to stay and retire here so we purchased a 4-year old house in early 2010 for significant savings from the original purchase price paid back in 2006. We actually signed the papers the eve of the “great tsunami scare of February 2010” – but that’s another story. Now that I am close to retirement and my wife will also be retiring in a couple of years from the Army, we feel we made the right decision to purchase the house we are in now. A couple of refinancings later, we now have a 15-year mortgage at 2.5%.
Dual-military housing allowances are a huge financial motivation to live off-base, and they can greatly complicate the rent vs. own decision. That’s also a very impressive mortgage rate!
Thanks for the mention, Doug. As you know, I’m a hypocrite: I like owning property, but I think it is a terrible idea for anyone in the military. I look forward to reading this book. It sounds like a great resource.
Thanks for your post, Kate, it clearly lays out the problem and the “solution”!
I think readers who are truly hard-wired to be landlords will rush in no matter how discouraging I can be, but at least they’ll do their research first.
Personally, after nearly 20 years on the job, I’m still ambivalent about landlording. When it’s good, it’s pretty good. When it’s bad, it’s awful. It may be a good income diversifier, but at least my spouse and I have agreed to stop at one property.
Ahh – the question that always comes up…..I think there is more to it than the financial aspect and your points regarding active versus Reserve are well taken. If one looks at their lifestyle costs, for most people the highest amount paid out monthly is for shelter, whether for rent or a mortgage. If that cost can be minimized, then the overall amount of resources needed to live go down significantly (25-50% depending on the region in which you live). There is also the emotional aspect of ‘owning’ the shelter you have and realizing that you won’t have to schlep your stuff to another shelter if something goes awry.
With the active military, you will most probably be moving at least every three years, so the schlep part from shelter to shelter will occur anyhow. However, if you are of an entrepreneurial bent, you could parlay the houses you buy at each station into a nice little rental real-estate income. I have met several intrepid souls who have done just that and upon retirement from their military escapades, truly retired with several streams of income. The main characteristic of the people I saw who succeeded at this was that they came from impoverished backgrounds and considered what they made in the military a king’s ransom. They tended to purchase homes that were in areas that had people who made less than them and they were very engaged property managers. So they were already LBYM and knew about hard work. Not all people are like that and I for one, when I rented out my house while activated, realized I did not like property management, so hired it out, further reducing any gain for myself (although for the most part I covered my costs).
So the answer, as you say above is ‘it depends.’ Real estate is usually an asset that appreciates, however, the word usually means that at times it depreciates. One needs to have long time horizons to enter into it as a business for profit or understand that they may lose money in the short to mid-term. One also needs to know their own risk profile and decide if owning the home is important for their peace of mind, if they like being a property manager if they wish to rent it out when then leave or move on, or as in your case, want to arbitrage the money into other investments.
For what it’s worth, I like peace of mind, so lean towards owning my shelter outright and have done just that – I work towards minimizing my overall lifestyle costs. I think I use belts and suspenders with my elastic waist-banded pants ;-)
Thanks, Deserat, you’re right– it’s a long-term commitment that many people wish they hadn’t taken on!
You know, Doug, our house purchase has been fairly disastrous to our net worth and we’re saved only by the fact that we’ve been able to rent it for close to our mortgage over the last few years.
That said, I had a friend who’s dad retired as an O-6, but bought properties at every duty station he was assigned to over the years. After he left each one, he converted them to rentals. Over time, he was able to accelerate the payoffs with rent payments.
When he retired he was clearing $30,000 a month in rent (before expenses, of course), all the properties were paid off, and they were all managed for him.
To me, that’s impressive.
Thanks, Mike, I know the feeling of managing property from different time zones.
I’m convinced that the hard-wired landlords will succeed in just about any market because they have the knowledge and the long-term patience.
For everyone else, this is the book that helps them analyze their personal situation and see what’s better for them!
I think the exit strategy of most landlords (probably including me) Is “probate”…