Case study: Active Duty Buying in Any Market

Many blogs published on BiggerPockets blogs use catchy titles and controversy.  I wanted to use a real example of one of the more expensive markets how buying can still be a Win.

First I want to state a couple of the advantages of renting.  Sometimes you have less responsibility.  Typically you can commit to a shorter term.  Usually there is less money down at the start.  Sometimes there is less monthly cost initially depending on the market.  These advantages can come into play, especially in short term situations.  

Now let's get into some of the positives of ownership, how to avoid some of the negatives, and ways to make ownership more powerful.

Starting off, owner occupant 2 to 4 family is one of the most powerful ways to jump start your investing career.  The additional rental income can greatly reduce your costs or in some cases put money in your pocket in addition to a place to live.  Singles or families that don't need a lot of space can find lots of options to buy, gaining rental income with owner occupant rates, down payments, and other advantages.  Larger families that require more space will have less inventory in some areas, but can realize the desired living space with the benefits of rental income as in the case study below.

In Key west, rents for a single room is typically over $1000.  Condos and small homes requiring work usually start close to $500,000 making it not an ideal location for investing.  However, military members can utilize advantages such as a VA loan that allows a down payment of only a couple percent (technically a funding fee) and also allows closing costs rolled into the loan.  In some case I have got a small check at closing.  Also, military members receive BAH (Basic Allowance for Housing) for living off base, which is location specific.  The military is looking to limit housing to actual cost like OHA (overseas housing allowance), removing the option of renting cheap and pocketing the difference, but either way, that is money you receive to live out in town.

The most important thing is to consider the numbers and exit strategies BEFORE you buy.  Knowing my BAH will cover the monthly expenses and what the unit we live in has rented for, we can buy with confidence without worrying about the need to sell or market changes when we leave.  In this case I will profit the rent from the other unit while also enjoying principle pay down, tax advantages, a fixed rate that gets better over time, and hopefully appreciation on top, when or if I choose to sell or refinance.  Just like other expensive markets, I could increase monthly profit moving up the island chain as well, but just like the renter, I want the location I prefer.

We always here about the advantages of leverage in rental property, but rarely is the importance of pay down or fixed rates mentioned.  Ask anyone that has held a property for 10 years about their payment.  Even if it was higher than market rental rates then, it is either much lower than market now or it has been refinanced with cash pulled out to buy another investment.  While some thing renting allows more freedom, you are tied to a lease and if you are month to month, you can be told good bye at any time.  Additionally, you might not pay insurance, repairs, and taxes separately, you can bet they are accounted for in your rent.

Giving an example of an actual deal here, the buyer put out $129,000.  His monthly payment was $3205, his BAH was $3465, and the small efficiency rented for $1350 starting on the 1st about 10 days after closing.  If the BAH and efficiency can generate $12,900 a year, there is a 10% cash on cash return before calculating any additional benefits while maintaining a place to live.  Looking forward to hear what BP nations thinks and what I might have missed.