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.
Don't forget to sign up for the free White Coat Investor Real Estate Newsletter that will alert you to opportunities to invest in private real estate syndications and funds.
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.]