Buying a House in the Military is a Horrible idea - Unless you Do this
Buying a House in the Military is a Horrible idea - Unless you Do this
Many service members have fallen into the trap of buying an over-priced house, which can lead to massive debt or foreclosure. This is often justified by "The VA loan requires 0% down payment, and renting the house to another service member will be easy!" While I can appreciate the logic in this statement there is just one problem, it is wrong.
The military provides a lot of resources to educate service members about purchasing vehicles, budgeting, and saving a percentage of your paycheck in a Thrift Savings Plan (TSP). Unfortunately, the military does not provide a lot of educational resources about purchasing a primary residence. As a result most service members do not understand the calculations behind a successful rental property.
For this reason I caution that sometimes it is better to rent an affordable apartment, than to purchase a house. (see buying Vs. Renting)
Look at the numbers, not the pictures
It is critical to look at a house as an investment from the beginning. In order for this property to be a safe investment it must be purchased without emotion skewing your decision. As human beings we are inherently emotion-driven creatures (whether we admit it or not), Michael Harris has a good post describing how we buy on emotion, and justify with logic here.
The point is, if you buy a house based on the pictures, curb appeal, or neighborhood, there is no guarantee that it won't be bleed money once you move out. These might be important factors to your family, but they come at a premium. This expensive house will not rent for much more than an equally sized house in a less exceptional neighborhood.
I recommend that you set objective criteria for purchasing a house, and stick to them! An example of this would be...
We will not spend over $200,000
We will verify through Rentometer that gross monthly rents should be over $2000 for this property (rent should equal at least 1% of purchase price)
Verify these numbers before looking through pictures online, or EVER stepping foot inside a property!
Why we run numbers first
The safest way to avoid overpaying for a house is to run the numbers first. Never look at a property (to include pictures) before running the numbers. The reason for this goes back to the emotional desire we have to live in a "pretty house." After scrolling through pictures it because easy to convince yourself to go look at a house outside of your budget. Once you're in the house it becomes easy to fall prey to the pretty kitchen, Jacuzzi bathtub, or big yard. These attractive features are consciously or subconsciously used to justify going over budget. Now you are the proud owner of an overpriced house that is outside of your comfort zone, and will cost money for you to keep (even when rented out).
NUMBERS DON'T LIE, LISTEN TO THEM!
Buy for Depreciation (don't buy for appreciation)
Another justification that used for purchasing an overpriced house is "The market is going up, and I will be able to sell for (insert absurd number here) profit when we move. Frequently this market information comes from a real estate agent (who works for commission), and I would be willing to bet you're not a market expert upon landing in a new town.
Buying for appreciation is a flawed approach because you can't guarantee what the market will do. I view purchasing for appreciation as gambling, not investing, and even if you "win" it will be taxed at 15-20% according to the tax policy center.
The one exception to this would be purchasing a property that needs a lot of rehab. In one of these properties it is possible to force appreciation by adding value through upgrades/remodeling! This is a great strategy but it requires a lot of work and time which we often don't have as service members. The other bummer about buying a "fixer-upper" is that the VA loan will not approve purchase of houses that aren't move-in ready.
Not being able to utilize a VA loan takes a lot of purchasing power away from the buyer. This substantially increases the required down payment and inherent risk.
Possible Consequences
Many service members are underwater on property that was bought as a primary residence, rather than an investment. I know a service member that bought a house a decade ago and would lose $20,000+ if they sold today! You don't become financially independent banking on appreciation.
Buy for Cash flow (verify rents cover expenses)
Profit is made when you buy, not when you sell! This is why it is critical to run the numbers before looking at a property. You should only look at properties that are certified cash-flow positive if you want to avoid bleeding cash.
What is a cash-flow positive property you ask? Cash flow is the amount of rent money left in your pocket after paying all expenses.
These are the numbers for my first Duplex.
141.83There are a lot of numbers that I analyze before ever looking at a property. If these numbers don't make sense I won't look at the property!
There are a lot of ways to analyze these numbers, but my favorite is the Bigger Pockets rental property calculator.
Conclusion
Buying a house can be the greatest investment of your life, or the worst. If you avoid these major pitfalls and purchase as a long term investment it will be a great decision! I would be happy to help analyze your investment criteria, and help bulletproof your plan! Stay tuned for more detailed posts about analyzing properties for cash flow!
Did this help you avoid buying a financial black hole? If you have comments about this post, or ideas for future posts, Post them below!
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