Buy or rent

[jugg34naut]

A month away from wings and my wife and I are starting to think about buying a house. We don't know whether we're going to Jax or Whidbey yet but we have started looking at houses and doing some research. I was curious what some of you have done in the past right out of the RAG. If we get P8 Jax then we had considered buying right out of advanced. If we went P3 Whidbey then we would rent something cheap in the RAG and then buy in Washington.
I was leaning toward just renting but a sim IP said that he regretted not having bought right out of the RAG about a millennium ago. It seems like it is better to be putting money toward my own house rather than paying somebody else's mortgage each month. I've also read that it takes almost three years to break even paying on a mortgage over just renting (an article by USAA). Thoughts? Also, what do guys do as far as renting the house out after the first tour? Can you contract a management company to do all the hassle work?
Another thing to consider is that if we get Jax the likelihood of us going back to Jax after all is said and done is very low but the opposite is true if we selected Whidbey.
The VA loan is tempting and we would have a moderate down payment of about 5%.
Thanks for any advice and wisdom in advance.

 

[villanelle]

Research both markets. Can you rent a place out today for enough to cover the mortgage, property taxes, HOA, insurance, and maintenance (1% of the home value per year, as a *very* rough estimate) and a property manager (most seem to charge 7-10%)? If not, I'd not purchase a place a that shows you both that you'll end up with more money in your pocket each month (though admittedly ignoring any possible appreciation, but also any possible depreciation), and that you likely will lose money when you leave if you try to rent it out. If you try to sell it when you leave, you face dealing with double mortgages (or rent in a new location) and the roughly 6+% you pay in fees will eat up much of any appreciation (and again, it could also depreciate). The old wisdom that buying is better than renting is seriously flawed. In many cases it is, but in many other cases and markets, it isn't. For every guy like your IP, there's a guy who bought a house in San Diego 7 years ago who is still waiting for the value of his place to come back up to his purchase price, never mind actually make him some money.

 

[Pags]

Rent. Buy when you get out.

 

[zippy]

My general rule of thumb is buy when you can, unless there's a compelling reason not to (ie homes are decreasing in value or there's no way you can find a property where rents would even remotely cover the mortgage).

My Realestate Broker in Jax is Peter Pacifico of Pacifico Propeeties. He's an S-3 turned P-3 turned C-40 guy who now sells/manages property full time. He's been in Jax so long he's practically a native and has run sales and managed multiple properties for me there. If you use him, tell him that his fam partner from VP30 referred you.

http://pacificopropertiesflorida.com

 

[Brett327]

Couple factors to consider for Whidbey ( I own two houses here and have been renting one of them out for ~10 years). First, the rental market here is very tight, I.E. there aren't a lot of rentals on the market and rents are up significantly compared to the last 5 years. Second, the conventional wisdom here is that the influx of P-8 squadrons here will further tighten the market for both rentals and home sales. Developers are already lead-turning this and new home construction is ramping up. Bottom line, it will be a good time to own a house in the Whidbey area and rents are likely to continue to increase. Both of these factors make home ownership more attractive.

It's very easy to rent your house after your tour. I've always used a management company to handle the day to day stuff - totally worth it, IMO.

 

[smoke_screen]

I'm no more qualified than anyone on here but I am in the double digits on rental properties owned now. This is just a data point for you and the circumstances matter so much it's impossible to give actual thoughtful advice.

-Fees/taxes: You know on Flip This House where they show the "profit"... and leave out the taxes part? It's an extension of that. Between random excise taxes (which I think approach 2% in Whidbey for example), huge title fees, and everything else, including possibly realtor fees that the seller pays completely, in my opinion it absolutely does not pencil to buy a house with the chance you will sell it in 3 years when you leave. (Not to mention the mortgage origination fees, routine repairs, sale prep, etc)

-Landlording is not for the faint of heart. Meaning, you will essentially lose your faith in humanity. It's not always the extreme stories but generally people could care less about the home, and it costs you money. I can't go into it all now but also owning near a military base you will also get tons of turnover, which is extremely expensive.

-In my mind its never worth chasing down renters for recapture. You just have to hope for the best. My data points are that it doesn't justify the expense and you will just end up eating it.

-The tax rules almost unbelievably favor owning rentals. Between interest expense, depreciation, travel expenses, it's actually hard to believe the incentives.

-There are other expenses like umbrella liability insurance, etc, that make sense that people don't mention.

-Biggest point: Owning a rental will adversely impact your ability to get a mortgage on the actual home, you actually want to settle down in, after you leave the navy. The property has to perform over a couple years, documented on your tax returns, be currently leased, and then you only get a portion of the rental income credited to your DTI, and your overall liability is higher.

I run my rentals like a business and oddly, I am almost exactly break even over about 15 years, not counting one important factor which is home appreciation over purchase price, but that breakeven does include principal paydown, taxes, and other common caveats people use to justify it. However factoring in the opportunity cost of investing in other things, I may be below break even. What I have going for me is essentially I am broadly exposed to the housing market in general if home prices increase over the next 20 years then I may potentially benefit.

Your sim guy wishing he'd bought seems to be on a different planet than you. Yes, once you determine that you will live somewhere for the next 40 years then obviously you buy. But not only is that generally unlikely, for you it's impossible. And, frankly there is a premium you may pay in rents for the option to be flexible with your career and lifestyle when you leave the navy.

All that said, I'd suggest avoiding ownership if you're not very serious about it. If you are, it's not rocket science, but a huge exposure to risk with disproportionate return potential.

 

[zippy]

Good points mentioned... Mortgage companies only like to count 75% of your rental income when using their debt to income ratio calculations. After you have more than 4 mortgages, getting financing for properties becomes more difficult, until you reach 10 financed properties, then theres only one company backed by Fannie Mae that finances properties 11-20.

There are varying schools of thought on which approach to real estate investment works best (buy and hold vs Flip, Single Family vs Multifamily etc) but Cash flow returns tend to be greater with multi-family properties which eases the burden when applying for subsequent mortgages with existing loans on income properties.

Down payments are not required for the VA loan and you can get low downpayment financing options from FHA and big lenders.

I recommend picking up several books on the subject (and a book on mortgages) if you're looking to invest in real estate.

 

[Zanklin]

Rent.

Not only what others have said, but you can potentially find yourself making career decisions based on a house/ group of houses. If you find that its time in your life to hang up the flight suit, but you have 3 mortgages to cover plus wife and kids to care for, do you think you will take a chance in the civilian world or keep plugging away at a relatively secure job you don't like anymore because you have bills to pay. Life happens in every occupation, but its theoretically possible to work at Google or Apple your entire life. In the Navy, you're out no later than 62, and really you only have a 17% chance of making it to 20 years, according to all the retirement reform talk. Also, you may retire but not as a 13xx. ( I am a case in point on that one).

 

[zippy]

As long as rents roughly = mortgages and you have some savings in case of emergencies, owning rental properties shouldn't negatively affect any decisions to stay in the military or leave. You're going to need a pay check either way and as long as your properties are self sustaining it shouldn't sway your decision.

 

[Tycho_Brohe]

and really you only have a 17% chance of making it to 20 years, according to all the retirement reform talk

That number refers to enlisted servicemembers making it to 20 years; the number for officers is 49%.

 

[SynixMan]

Don't have much advice for you since I'm still waiting to see how my house buying gamble works out. I'll give one piece of note though: if you think you're going to have a bunch of time to fix up a place that needs some TLC during your first sea tour, you're smoking crack.

 

[Pags]

Rent. Buy when you get out.

I had to cut my initial post short...a lot of others have hit the high points.

Renting, while it can feel like "throwing your money away" buys you a lot of flexibility. The career you're about to embark on requires a lot of flexibility, so renting and the military lifestyle go together real well. Odds are that if you go to either place, you'll be going someplace else on the next tour. Neither location is a fleet concentration area (SD or Norfolk) so if you don't stay in that area for your second tour you probably won't come back until your DH tour. After your DH tour, you're more than likely going to move somewhere else and you have even slimmer chances of coming back as a XO/CO. Bottom line: you won't be living in your home a lot.

Other PCS point to consider is that you very well may be given orders on a short notice and have to move quickly. For my overseas PCS i was given two months notice. So, living in a rental was nice. We gave the landlord 30days, packed up our stuff, left, and never worried about that house again.

Another thing to consider is how much house can you buy? A four bedroom home is the coin of the realm for resale and renting. Can you afford to buy a 4 bedroom home in an area that you'd still want to move back to two kids later?

And like Synix said, don't even think about getting a fixer-upper. During your first three years in the fleet you'll be lucky to spend 1.5yrs in your house.

 

[zippy]

Jax and Whidbey are fleet concentration points for certain communities.

The average amount of time I've had any of my places empty in Jax has been two-three weeks, and that was after I first bought them (I own 12 units in 4 properties in the area so a couple vacant units during that time mean less profit, and worse case, only expenses covered- but so far no losses thanks to buying multi-plexes).

Regardless of whether you buy in Jax or Whidbey, buy in a place where the types of people you eventually want to rent to want to live, and buy the type of property they want to live in. Price isn't always everything, but location often is.

 

[nittany03]

Regardless of whether you buy in Jax or Whidbey, buy in a place where the types of people you eventually want to rent to want to live, and buy the type of property they want to live in. Price isn't always everything, but location often is.

Sage wisdom. That said, also ensure you finance the place so that it can be self-sustaining after you move. Everyone who owns rental property in Anacortes or "The O.H." knows what BAH range they're targeting. If mortgage + HOA dues (God help you) + property manager fee >= the local BAH for your target audience, you're doing it wrong. You'll be in the place for 3-9 years, and then you'll be stuck with it for 11-27 years after that, assuming you don't pay off principal early or refi. Buy accordingly, and don't plan on making bank through real estate. If you make money on real estate appreciating at anything greater than the rate of inflation, you're not Warren Buffet Mark II. You're just lucky.

 

[ea6bflyr]

From a tax perspective, buying while on active duty is almost criminal. The Military gives you TAX FREE money to pay rent/mortgage. At the end of the year, you get to take a tax write off for your home. You are double dipping.

I owned 3 different homes while on active duty (almost 4). Never bought in Cali because the home prices were/are crazy. I would do it again all over.