Buying Vs. Renting in the military

This is a blog post from my newly developing website www.frommilitarytomillionaire.com If you make it through this please leave some feedback (I can handle it). Using this as a learning experience, and hoping to impart some of the knowledge that I wish I had been told when I enlisted. Thanks!

Buying Vs. Renting in the military

During our time in the military, and life in general, we will have the opportunity to live many different places. This provides some unique opportunities that might be otherwise unavailable if we were to stay in one place our entire adult lives!

One of the key factors in determining how to answer this question, in my opinion, is the cost of living in your location. If the median home price is low and affordable it will almost always make sense to buy the property you live in. On the other hand if you're stationed in Hawaii like I currently am, and the median home price is $700,000+ there is a good chance that the numbers won't work for you. There are exceptions to this rule of thumb that some utilize as justification. An example is if you are investing based on the state of the market, and expect the median home price to appreciate in value. I personally do not like this approach because we cannot guarantee appreciation will occur, so I prefer to invest for cash-flow or renovations where I can force the appreciation through upgrading.

Buying

Pros

-Building equity -Ownership -Benefit from appreciation -Can upgrade/remodel as desired -Ability to make money from the property while living in it, and long after moving away.

Cons

-Will suffer from market collapse

-Responsible for all repairs -Not as easy to uproot -Must make sure the numbers/financing works

Buying a house is considered by most to be a great investment, and in some instances you are correct. Robert Kiyosaki Author of Rich Dad Poor Dad, claims that a house is not an asset because it doesn't provide income (most of the time). Even once the house is paid off we must continue to pay taxes, utilities, and repairs. This is a controversial viewpoint, but the key thing to remember is that an asset earns you money, and if your property is not earning money than it is not an asset. There is nothing wrong with this, but you must come to terms with it if you want to better your financial situation.

I understand, and agree with, this philosophy for the most part. Below we will discuss house-hacking, and this is a method to turn your house into an asset, and allow it to earn money for you, while simultaneously providing a roof over your head.

Renting

Pros

-Affordable -May not have to pay utilities -Repairs not paid for by you -Not effected by market...in fact market crash might lower monthly rent for you -Easier to uproot

Cons

-Not building equity

-Don't benefit from appreciation or upgrades -Cannot make money from it -Might get told to leave

Renting is a great strategy for those living in a city where the median home price is too much to justify buying a house. In cities such as San Francisco, New York, and Honolulu I would justify renting a small apartment, with minimal expenses, and pocketing the difference between your housing allowance and rent. By doing this you have found a place to live, and a way to increase the amount of capital going into your investment account! 

If you want to get extreme about these savings, look for a studio apartment, or spare room in somebodies house, and rent a storage unit for anything that doesn't fit. This should be about the cheapest way for you to live in these expensive areas.

It is important to treat the difference between your monthly living expenses, and housing allowance as non-existent. Whether you save $50 a month, or $1000, you should put every penny into your savings/investment account! Otherwise you are living in a small apartment for no reason. Invest the money you saved!

House-hacking

Pros

-Building equity

-Ownership -Benefit from appreciation -Can upgrade/remodel as desired -Tenant pays your mortgage, and you get to pocket the difference. -Encompasses the Pros from buying and renting into one great living situation. -Can rent your unit out when uprooted, and now it generates passive income. Cons -Will suffer from market collapse -Responsible for all repairs -Tenant lives next door -Must make sure the numbers/financing works

I recommend this option to everyone I meet when they are looking for a place to live! This is what I did 3 years ago that started it all for me! I purchased a Duplex and lived in one unit with a tenant renting the other unit. I will show the numbers below, but my tenant paid most of my mortgage, and I got to pocket almost my entire housing allowance.

House-hacking is when you buy a 1-4 unit property and live in one unit while renting the other unit(s) out. This allows the tenant(s) to pay your mortgage down, and you can live in the property for close to nothing! If the numbers work out well enough you can actually make money each month and pocket your entire housing allowance while owning the roof over your head! You can also claim the tax benefits of a rental owner, such as depreciation and the interest payments made on your mortgage.

But wait, it gets better! When you move out of the property you can rent the unit that you were living in and all of a sudden the house you had lived in is now a passive income source! Then you house-hack at the new location and repeat this process while building your portfolio! You could even utilize the VA loan as a military member and buy your multi-family (no more than 4 units) property with 0% down payment!

Think about this for a moment, you could potentially buy a house that other people are paying off for you. A house that might be making you money while you live there, and will make you money after moving out. If you use the VA loan you could buy this house with less cash than a rent deposit would be to move into an apartment! 

What this could look like (I used FHA loan 3.5% down payment because I didn't understand that I could reuse my VA loan at the time)

Duplex

Entry numbers

Purchase: $81,000 Down payment: $2,835 Monthly numbers while living in it Rent income: $515 Mortgage/taxes/insurance: $590 Property Manager: $73.50 Utilities: $120 Total cost of living (plus repairs) $268.50 Housing allowance was $850.00 I pocketed $581.50 every month!

Current monthly numbers

Rent income: $1050

Mortgage/taxes/insurance: $590 Property Manager: $73.50 Money left for repairs/me $386.50 I keep $200 a month to budget for Repairs/Cap Ex estimations. This property makes me $186.50 every month now that I have moved out! Using these numbers you can see that I was able to recoup the cash I purchased this duplex with in the first five months of collecting my left over housing allowance! Conclusion

Hopefully this helps you decide whether it is more beneficial to buy or rent in your area. More importantly I hope that this inspires you to look for a property to house-hack so that you can get started on the path of real estate investing while simultaneously building capital for your next investment!

What are your thoughts on buying vs. renting?