By Dr. Charles Patterson, WCI Columnist
Buying a home while serving on active duty is a financially hazardous proposition. It’s such a risk, in fact, that my general guidance is to avoid it altogether. Patience, aggressive saving, diligent investing, and a modest lifestyle are the bricks laid on the golden pathway to financial independence. To be successful (or at least to break even) in homeownership, one needs time, stability, resources, and thorough planning. Since most military physicians are young, likely to leave the force after their initial commitment or to get reassigned, and in the tenuous early years of wealth-building (on a government salary, no less), the deck is squarely stacked against them. Buying a house on active duty is not much different than buying a house during residency.
Simply, it is ill-advised.
Are there exceptions to this rule? When would it become reasonable to consider purchasing a home? The following non-inclusive list will explore the rare circumstances where a home purchase on active duty is feasible or even recommended.
When to Definitely Purchase a Home on Active Duty
Yes, there certainly are circumstances where buying a home on active duty is clear-cut:
- You are guaranteed to buy very low and sell very high: If you know that you are going to make an incredible sum after accounting for transaction costs, taxes, incidental expenses, maintenance, and time, then you should absolutely buy the home. If you’re reading this and thinking “You could never know that, it’s all presumptive,” then please picture me blankly staring back at you, nodding in agreement.
- If you’ve got nothing better to do with your time and money: If money and time are completely expendable, then this probably isn’t much of a conversation for you. But even then, you’re still better off renting.
- If you’re going to be stationed at a location for 20+ years: Having cemented geographic stability and earning a predictable income, you could be (and likely are) better off buying. The problem here, of course, is that circumstances can and do change frequently in the DoD. Many folks who are either assured of stability or presume that they are unmovable nonetheless receive orders to a new base.
- You are a real estate magnate masquerading as a service member: Perhaps you are a savant when it comes to real estate or maybe a syndication operator who got an itch to serve their country but wants to continue managing property deals. By all means, don’t let me dissuade you, but make sure your leadership knows what’s up. The last thing you want is a deal going south because of command interference.
But let’s be honest: There is no “definitely” in the military. So, take everything I just wrote above with a grain of salt, because you’re not guaranteed anything.
When to Consider Purchasing a Home While on Active Duty
Foot-stomping here: Buying a house while on active duty is not advisable. But there are one or two exceptions to this rule. Broadly speaking, the idea of buying becomes rational when one is:
- Reasonably confident of geographic and social stability
- Has established a prudent financial plan, and
- After diligent consideration, is accepting of the risk.
We will take these in order.
Geographic and social stability are paramount to home-buying success. In the same way that options and day trading are speculative, so too is buying a home with an uncertain or limited timeline. A buy-and-hold strategy is the surest way to come out ahead with housing. That means that you are in a job you like in a place where you’ve got no plans to leave. It also means that the home is functional and accounts for evolving family needs.
A robust financial plan that includes a budget and investment strategy must be in place (and practiced!) before considering a home purchase. Long-term goals (financial independence, kids’ education, healthcare, etc) must be accounted for prior to adding the risk associated with homeownership. Failing to contribute to retirement savings for two months because a roof needs to be replaced isn’t acceptable. A plan to include a deep reserve for repairs and incidental costs must be established in the context of your long-term financial goals.
When I say that there is risk involved with home buying, the greatest is calamity (market crashes leading to short sales, foreclosure, bankruptcy, etc). If you lose serious money on a dumb housing gamble, it could take decades to recover on a military salary.
To illustrate this point, consider an officer who bought a home in 2006 for $220,000. All was well until the market fell out from under them and they received orders to Korea in 2008. With neither buyers nor a means to keep the home, the officer sold it for $60,000. The loss (which is not including transaction costs) was three years’ worth of salary. Sure, you say, she could have rented it (assuming that she could find a decent tenant), but that ignores the risk of income reductions.
Since Base Allowance for Housing (BAH) rates reflect local markets, your income can change dramatically when you get to a new duty station. For instance, if you are stationed at Pearl Harbor, you may be bringing in over $3,000 per month in BAH. But if they move you to Fort Bliss in west Texas, the allowance is half of that. And if you are directed to live on base, you get no BAH at all! Thus, the proportional cost of a home as a long-distance landlord (vacancy, maintenance, management fees) may increase tremendously through what is ostensibly the opposite of geographic arbitrage.
Consider the risk of buying in the context of the potential benefit. Over the last decade, I’ve had several colleagues tell me that they “made out like a bandit” with consecutive home buys. Let’s examine that further. Say the person bought a home for $300,000 and sold it three years later for $350,000. Great success, right? Well, maybe. Between 12%-15% of the price is going to transaction costs. Fine, so subtract about $40,000 and you still “make” $10,000 on the property. How much did you spend on updates and maintenance on the home over those three years? How much time did you spend on that honey-do list? Further, assuming a standard conventional or VA loan, one will pay roughly $70,000 in mortgage payments over those years, with anywhere from 30%-40% going to the actual principal. Accounting for interest, taxes, and insurance, one has “lost” about $45,000 in order to “own” the home. Sure, it's less than the $80,000 you would’ve paid for rent, but the margins are by no means robust in even the best of markets.
Stability, a proper financial plan, and a thorough analysis of the risk and benefits are necessary to justify a home purchase. Should you find yourself seriously considering a home purchase while on active duty, here are 11 questions to mull scrupulously:
- Can I be told to move in the next five years?
- What is the plan for the home should I be ordered to move in 2-3 years?
- What is the ops tempo (deployment/TDY pacing) at my unit?
- How will my family needs grow or change in the next five years?
- How well do I know and enjoy the local community?
- Will I be in a training environment?
- How much [more] will I be leveraged by virtue of this mortgage?
- How would unforeseen costs affect my savings goals?
- How would a significant loss set me back on my journey to financial independence?
- How much am I willing to lose on this endeavor?
- Can I afford to become a long-distance landlord?
Buy a Home When Prudence Dictates
I have posited here that three factors (stability, financial planning, and risk tolerance) are required before the idea of homeownership becomes less than laughable while on active duty. Even when they are fulfilled, however, the convenience that comes with renting a home or living on base can be invaluable. Here’s the rub: the military salary and lifestyle burden the value proposition of ownership immensely. A service obligation adds a layer of lifestyle uncertainty that bodes poorly for homeownership.
Many service members have come to learn that the water heater dies, the pipes burst, and the kitchen floods only when a spouse is six months removed and 12,000 miles away. When you rent, these are problematic but not your problem to solve. The trouble is, it can be very difficult to factor convenience into a rent vs. buy calculator.
It may not sound like it, but I am an advocate for homeownership. I think there is even room in there for (a little) measured risk. I would be among the first to extol its benefits and, in the same breath, lament the sage exclusion of service members. But that is part of the sacrifice. To purchase a home on a limited budget, an unknown time frame, and in a critical phase of wealth building is a risk worth avoiding.
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Did you buy a home while on active duty? Did you “make out like a bandit,” or did you end up going into the red? Comment below!
[The views expressed in this article are those of the author and do not reflect any official position of the Department of Defense or the US government. These writings are not authorized, approved, or endorsed by any of the above entities.]
We bought our first house after being told / promised we were definitely going to be in a location for 6 years. A week after closing that got changed to 3. Wound up actually being 5 because I was able to find a next job at the same base, but still. Happily wound up grossing 52% price increase over those 5 years, but that was pure dumb luck and not any savvy/skill on our part.
Current duty station / recent housing market, searching for months we absolutely could not find a rental that had what our family needed (4 kids need space, plus sickly grandma needs her own bathroom/a second master suite). So, bought again, 10% less than the selling price of our last place, but now we are back to stressing over whether the market will hold 2 more years vs whether I can swing a second tour here/nearby so we can extend to the 5-6 year point again.
Does get a little frustrating when I see MACP couples able to play games and homestead at the same base for 10-15 years. “Oh, can’t you extend me, my husband is here for 2 more years…oh, can’t you extend my husband, now I’m here for 2 more years …yeah, since you extended him, can you extend me again…”
If you couldn’t find a place to rent, why stress? You only had one choice. You just won’t find out until the end what the real cost of consuming your housing for a few years was.
Can you expand on the last comment? How do people manipulate MACP to homestead?
Thanks for sharing, KFM!
The housing market really has gone wild over the last 4 years, and at the time this piece was written we weren’t seeing the margins that we are now (52% is not uncommon). For those who lived through the 2008 financial crisis, this margin was reversed. Another reason why time on station can be so important, and highlights the unpredictable nature of medium-term market factors.
It still amazes me that there are [quite a few] active duty members who stay at one base for their entire career. Depending on their specialty this could make sense, but it changes the calculus quite a bit.
Looking back at the numbers, it is hard to tell if one has lost money (or not) renting versus owning. As we are now in the process of selling the second home we bought while on active duty (but just by luck at least got 16 years out of living there), we don’t even have the numbers back yet. However when I factored in my crazy desire to have acreage, do weird stuff to it like plant trees and have sheep and chickens, and not have anyone come by and tell me I can’t do that to the lawn, I figure the houses I actually wanted and as it turned out got to enjoy (only 4 years for the first one though) would have cost so much in rent – possibly double the going rent for a similar house on a smaller lot and with restrictions – that I am glad to have bought rather than rented. Ask me again when I hear from the contractor how much money it will cost to fix up my house after 16 years of living there so that I can MAYBE get back at least the purchase price. A side note – the empty three acre lot I bought from the same seller and never did anything but walk through, shoot on, and get poison ivy in, did sell for a small (2-3%/year) profit. That again was just luck.
I would add another reason to buy, if you have a “home base” you are likely to return to and/or think you will retire in. Yes, no guarantees and the future can change, but if it is somewhere you would actively want to return to, buying and renting in between is not a terrible idea. In our case, Ft. Bragg NC is home for my wife’s family, so we bought there several years ago. The post is big enough with opportunities for me as a military physician who has moved up the ranks to have spent 9-10 years of a 24 active duty career at Ft. Bragg, 5 of those in this house, easily rented in between. I have been able to leverage family as rental “management” for a whopping $100 a month, and that is after fighting with them and insisting they take the money, but I have used traditional rental management companies in the past. We still intend to retire there, so mortgage continues to be paid down, and we check on the property when we go home to visit, tax deduction for the trip!
You make an excellent point: if one intends to return to the area later on and is happy with the area as regards renting (and being a long-distance landlord), the argument to buy is stronger.
Even still, for a young military physician, this is a large amount of risk. Certainly not saying that it can’t work out. But between time and leverage, this play can come with a hefty dose of cortisol.
We’ve gone through the exact same decision matrix (the focus of an upcoming post). But believing that you will return to an area and knowing that you will are a touch different: easier to say that you will stay in an area at the end of a military career; less certain if you are a 3 year captain. Lots to consider in addition
We did the 16 at career end- only 5 years still on active duty but likelihood high school stability would mean at least Mom and kids would stay even if Dad had relocated. We might’ve stayed until we aged out of the house but grandbaby called us to downsize earlier. (And always mused “we haven’t lost money until we sell”.)
However some fields- Army RAM and Ft Rucker or burn unit/ amputee rehab specialist and top burn unit/ rehab unit of your service (if those specialists ever stay in for 20) might give you a foothold beyond the dual career couples AND make likely your return to post for another tour.
I would add one other rare scenario which people are predicting now. If the market is bottomed out you can buy, feeling very comfortable because presumably you are in a military town where you will have plenty of future renters, and turn that house into an income property.
I have a house in SD that I purchase from 400k in 2020 that is now worth 1.2M and clears 1300 a month in profit after management fees. I will hold onto this one as an income property, unless I get another set of orders to SD, in which I will take it over. I have another house in the east coast where I’m currently stationed living in that I purchased in 2018, for 486k now worth 900k. I probably have dropped 100k in each for repairs and upgrades over time. If I rented out my current house it would clear about 10k a year.
Would I purchase again? Depends on the market of the next duty station, because I see the merits in both. Time will tell.
I find it interesting that you view cash flow of $15,600 on a $1.2 million investment as some sort of awesome deal. You realize that’s just 1.3% right? I mean, the yield on the stock market is higher than that. Your investment at this point is just a play for appreciation not some sort of cash-flowing income producer. What you paid for it two years doesn’t matter as far as returns going forward from this point. Why not take your $800K+ in equity and invest it somewhere that you can get a better return?
I could see how this could be confusing and I guess I didn’t make myself clear, how this should be viewed as a win, mostly due to other people’s money.
The initial investment was Zero Dollars. Because VA loan.
So in 12 years, this investment of zero dollars has returned approximately 800k in equity. I can’t predict the future but the last two years has averaged a home price increase of 30% per year.
In addition, at the current time, the mortgage (inclusive of insurance/taxes) and Management fees, is covered by the Rent. After which there is a passive income of as you said 15,600 a year.
So in summary, off a zero dollar investment, and 100k invested for upgrades and repairs.
The property provides 15,600 a year in passive income with zero risk, because the mortgage is covered, and over 12 years, it has gained an average of 66k a year in equity, but at the current rate an increase of 200-300k in equity would not be unheard of.
Now I don’t have a website, nor the math formulate handy, but those type of gains, off of a zero dollar, out of pockets expense VA loan…..well that works out just fine, and slightly north of 1.3%.
In regards to the why not sell argument? And invest the proceeds in something as amazing as the stock market? Ignoring the obvious downspin the market is currently in….
If I had to move back to San Diego next year, because of the military, I’m not sure I could afford a mortgage in San Diego, but I could move back into my house, and save 3-5k a month in rent (minus the costs of mortgage of course), whilst still collecting the gains in equity. Because everyone loves sunshine (San Diego), and the market reflects that.
Sounds like your return is $700K, $1.2 million minus a $400K loan and $100K you put in. No doubt it has been an incredible investment…in the past.
But the question you face now is what to do with your $700K now and in the future. I’m arguing that getting $15K in income from a $700K investment is not impressive and maybe you should consider doing something else with the money by selling the property. That might be stocks. It might simply be more properties. But it sounds like you’re considering moving back into it, so that would make sense why you’re holding on to it (might also save you $250-500K in capital gains too if you do that.)
I understand your position, but given that the housing market in that region is on steep upward trajectory, and beating historical stock market trends, and destroying current stock market trends, selling to move into alternative equities just doesn’t make sense.
Perhaps if the home was in a market that wasn’t showing such steep growth, and more in the historic 2-5% range, then selling would be something to consider.
That said I get cash offers regularly, and if they ever hit a high enough number I will take it.
You’re using the present tense when it is more accurate to use the past tense, unless for some reason your crystal ball is more clear than the rest of ours.