A recent article in the Air Force Times newspaper discussed the topic of whether military members should buy or rent a home following a PCS move. With the summer move cycle upon us, many active duty service members are considering the options now. The desire to own the home you live in is a strong one. We’ve owned four homes over the years and the experience has been generally good, but also with a significant amount of emotion and, at times, stress as all of us can imagine.
Noted radio talk show host Dave Ramsey often hears from military couples (often the non-military and female spouse of an active duty member) saying that they’ve PCS’d and either have a vacant home at their last duty station or are renting their home. With real estate resales at record lows, we are currently in a buyers market and for some military members who want to sell, their homes linger on the market well after their “Report Not Later Than” date. Mr. Ramsey almost always uses these opportunities to urge military families not to buy since they will not be able to recoup their aquisition costs (loan fees, real estate broker expenses, and prep-for-sale costs such as repairs and painting).
On the other hand, if you are a buyer now may be a singular opportunity to maximize your housing allowance. If you will likely be in your destination base for a minimum of three years, now just might be the time to buy instead of renting.
So, how do you decide? A good way to start is to pre-qualify for a mortgage. There isn’t much point to getting all worked up about buying a house only to find out that you cannot get a mortgage or can’t get one sufficient to buy in the market you’re assigned to.
Once that hurdle is passed, and now that you have an idea about the size of the mortgage you can get, take a look at the base allowance for quarters (BAH) for your next duty station. (You can find it at http://www.defensetravel.dod.mil/site/bahCalc.cfm.) By keeping your mortgage payment, including taxes and insurance, as close to your allowable BAH you’ll ensure that you’ll be able to afford the home, and if you become a landlord in the future, that your potential military tenant will also be able to cover most of your expenses.
Next, you’ve got to have some money set aside for purchase expenses. Some people will take military pay advances related to their PCS to help defray these costs, but it’s not the best choice. The very best option is to plan ahead, perhaps using the 8% solution we’ve talked about earlier. Using this method you save 8% of your net pay every month. In a three year assignment you’ll save three months net pay, which should be the minimum you have set aside when you decide to buy.
You’ve probably heard the top three criteria for real estate. Location, location, location. It couldn’t be more true for military members. We want to be close enough to minimize the drive to work, without so much jet noise that is keeps the kids up at night. We also want to be close to good schools, shopping, restaurants, and for some, nightlife.
After the desired locations are mapped out, you can create your wish list. Number of bedrooms, size of yard, garage spaces, bathrooms, custom kitchens, media rooms; some or all of these may be important to you, but they’ll all have to be tailored to your budget and your priorities. We compromised on commute for schools on more than one occasion, and we didn’t always get the room sizes that we hoped for. We also had laminate countertops when all our friends had smaller yards and granite. For each, it’s a decision about what’s important and what’s not as important.
One “advantage” of buying is that you can often tie up a house months before the PCS date, allowing you to work towards a door-to-door move. I put “advantage” in quotes because it’s also a long-odds bet that everything will get done on time and that the keys will be in your hands when you need them. And, how many of us have had our orders changed at the last minute. To have a home purchased in a city (or country!) you don’t live in could definitely maximize the stress level at home.
Our personal experiences have been that home ownership has been a financially break-even activity. Our housing expenses have exceeded our BAH when all costs are factored in, but we had a level of freedom that we appreciated.
In our “simple plan for military families” we suggest that members purchase a home only after five years of saving and personal growth. After that, you’ll be positioned personally and financially to make a good decision about owning a home. We suggest purchasing that home on a 15 year mortgage and buying using the techniques described above. WIth today’s interest rates on a 15 year mortgage, and with the inventory available in most markets, you’ll get a lot more for your money.
We invite you to comment on these ideas whether you agree or disagree. What have your homeownership experiences been like?