By Dr. Charles Patterson, WCI Columnist
Homeownership is a staple of wealth-building in America. The ability to purchase a suitable home and pay it off at a favorable interest rate over the minimum necessary time is critical to securing financial independence. Further, the diversification benefits and tax advantages buffer a portfolio against inflation, equities market downturns, and social instability. Absolutely, it's not all roses. But when even Dave Ramsey says it's OK to go into debt to buy a house, you know there must be some serious upside.
The rules that govern responsible home purchases would exclude the majority of military members from participating in this system. Most service members only spend 2-4 years at a given duty station—which means that over the course of a career, one might move 5-7 times. Imagine the mountain of transaction costs if one purchased a home at each of these stops! Relatively low compensation and variable allowances give little leeway in the budget as it is. Cost of housing, market volatility, and the risks of becoming a long-distance landlord are just a few of the bigger problems associated with owning a home while serving.
In this column, we will explore the housing conundrum and perhaps some solutions worth sharing.
How Does the Military Base Allowance for Housing (BAH) Work?
The Department of Defense (D0D) provides a tax-free pay allocation called a Base Allowance for Housing (BAH) that is intended to offset costs for those who opt to live off post (or who are unable to live on base due to non-availability). Rates vary by duty location, rank, and family status, with the noble goal of offsetting the cost of modest, equitable housing.
The first question for all prospective homebuyers (and used car salesmen) is the budget. There are several useful rules to follow, with some stating that principal, interest, taxes, and insurance shouldn’t exceed 28% of your take-home pay, while some gurus say it should be less than 20%. Others state that the purchase price of the home should not exceed 2.5 times your annual income. For the frugal home buyer whose goal is to keep costs as low as possible, this might mean a mortgage that can be paid off in 5-10 years.
But for active duty renters, the goal should be to keep housing costs under the monthly BAH. While it is certainly nice to have, it typically doesn’t add 25% to take-home pay unless you are stationed in a very high cost of living area. Finding affordable rentals can be difficult in these cities and often housing costs won’t be covered by BAH. This also means that unless a spouse is in the workforce or one is moonlighting, costs of living become a real drag on savings goals. When budgeting for a home or rental, the 25% rule applies. There is a reason that places like Missouri and Ohio are favored by military families over Los Angeles, Boston, and Washington DC: they can better afford to live in the middle of the country.
Affordable Housing Solutions for Military Members
Having established that the military doesn’t pay you much for housing and that after a 20-year (or 1o-year, or however long) career one can arrive well behind compared to civilian peers, I am sorry to say that none of the remedies are particularly palatable. But there are options:
#1 Live on Base
This is the simplest living solution in the military and one that many folks would prefer. Particularly for short-term (1-3 year) assignments, base housing is generally tolerable (though horror stories abound), and it's relatively easy to move in and out. Utilities are taken care of, and if there is a problem with the unit, a contractor is sent to fix it at no cost to you. It is not glamorous unless you are higher up on the food chain, but the daily commute is walkable and the community is secure. If you are living on base, however, you do not receive BAH. Availability can also be spotty, but if you find on-base housing, then there is really no financial risk to you. If you're living on base, it would be wise to save 5% of each paycheck for a future home purchase.
#2 Rent a Home Below BAH
Keeping in mind that the housing allowance increases with rank, most of the readers on this forum would qualify for a sum that is not paltry and markedly higher than enlisted persons. Thus, finding a rental home that will satisfactorily address your family’s needs is not only possible, but it's also much easier than for the great majority of people who work with you. There’s more upside, too: thanks to the Service Members Civil Relief Act, there are special protections in cases of deployment or the like. Again, living below your means when renting will allow you to save more for the dream home in retirement.
#3 Buy a Home
Proceed cautiously. Given market volatility, the ever-present risk of a quick assignment change, and the odds that you will likely never return to that duty station, buying a home in the military is the riskiest and least advisable path. Stories abound of service members having to go through a short sale, deed in lieu of foreclosure, or even foreclosure during the 2008-2009 crisis. One officer I know bought a single-family home for $220,000 in 2006, received orders to Korea in 2008, and sold the home for a whopping $60,000.
Sure she could have rented it out, but that time period wasn’t exactly stellar for becoming a long-distance landlord. For an even more rousing endorsement, ask Jim Dahle about his Virginia home. Even if you are on the tail end of your career and stationed in a place you are staying afterward, chances are your income is going to skyrocket after separation/retirement. Are you really going to want to stay in your military home when, in a few months, you can afford something much nicer? This concept is explored in further detail below.
#4 Get (Very) Creative
There are seemingly endless possibilities to address the housing conundrum, and if military members are good at one thing, it's being “creative” with sparse resources. The horizons here are endless and include things like getting roommates or running an Airbnb. Some folks purchase land and place a manufactured home on it. A not entirely uncommon story entails living out of the family travel trailer. While this latter move is most common as a temporary housing solution during a Permanent Change of Station (PCS) move, I’ve known families who have done this for extended periods. The DoD never wastes an opportunity to inspire resourcefulness.
Unfortunately, there is no easy or riskless way to win the housing game when you're serving. You just don’t get paid enough, and the lifestyle is incredibly unpredictable. The good news is that you will still be relatively young and in your peak earning years when you exit. Electing to rent or to live on base is the conservative course that seems to make the most sense. It's not sexy, and going through your entire career having not built equity in a home is a tough pill to swallow, but the cost savings and convenience are undeniable.
When Should Active Duty Service Members Consider Buying a Home?
There are some situations where buying a home while on active duty might make sense, but keep in mind that these all represent best-laid plans. Market conditions would need to be near perfect for you to overcome transaction costs, taxes, and upkeep. That said, if you have some semblance of stability—such as a retirement date, Guard status, or a homesteading agreement—the benefits of buying make the proposition more enticing. In essence, the same factors that would make sense for a civilian to buy a home apply to soldiers, airmen, and seamen: geographic and occupational stability, plans for long-term holding, a reasonable market, a dutiful understanding of the costs of ownership, and a careful plan for efficiently discharging the mortgage.
The above criteria for home buying while on active duty are limiting. But just like residents and new attendings, military families want to scratch the grand ol' American home-ownership itch. The idea of renting for four years (typical Health Professions Scholarship Program (HPSP) obligation), let alone an entire career, seems like “throwing away money,” tens or even hundreds of thousands of dollars. This argument somewhat ignores two facts: 1) housing is consumable and 2) it could be worse. Firstly, the costs of ownership can easily outpace the increased expenditure of rent. Add in time spent on repairs that could have been parried to a landlord, and all of a sudden, renting looks a lot better. Secondly, should the market tank, should the base close down, or should any number of not-so-uncommon hardships befall the local area, selling or renting the home can become difficult. You lose money that way—serious money.
Buying a home while on active duty is a risky proposition, and one that we will look at in greater depth in a future article. There are success stories out there, but it’s a bold move that seems to get more press than the abject failures. And if fortune favors the bold, misfortune favors the newly impoverished who thought they were being bold.
Should Military Members Rent Out Their Home?
The allure of passive income generated by real estate is a siren’s call to active-duty homeowners. Think of it: you could buy a home at each duty station; rent it out; and, by the time you separate or retire, you will have accumulated an exceptional portfolio of revenue-generating assets. Emboldened by success stories and the logical appeal of positive cash flow and equity building, service members are drawn to rental properties made from their owned (mortgaged) homes. The set-up is simple: buy a residence at your current station, then rent it out upon your departure. This is particularly popular around training bases, where the rental markets are typically strong given the short-term nature of the assignments and the frequency of temporary duty tours.
Again, there are plenty of success stories (too many?) of military members who buy a home and then rent it out. While the value proposition is lustrous, the risks of such arrangements going sideways are myriad and understated. In addition to the problems associated with being a long-distance landlord, there are issues with vacancy, state taxes, upkeep, and property management fees that all conspire to eat up whatever profit you might have. Not to mention the liability and asset protection considerations—base legal and your chain of command will have no sympathy (nor recourse) for what they consider to be “unnecessary personal risks.”
Also, being highly leveraged on a military salary (reference BAH above) doesn’t seem wise, because it's not. But this strategy is commonplace and yet complicated at the same time.
How to Beat the Military Housing Problem
Sometimes the best win that can be mustered is a minimization of losses. In this case, living on base or renting a safe and reasonable home are likely the best solutions for most military families. I will be the first to admit that renting for years on end is suboptimal. But it’s certainly better than flushing thousands more on transaction costs, taxes, and upkeep. These losses can be devastating—recovery can take decades and can affect your ability to buy your desired home in the future. Even worse, such setbacks could delay your financial independence itself. Keeping the perspective that housing is a consumable and that military service isn’t forever insulates you from bad decisions.
I often think about my dream home. It’s perched on a hill, adjacent to several trail systems. It’s far enough (but not too far) from work that I enjoy, in a community that we participate in actively. There’s plenty of room for my kids—and their kids, too. My wife likes it and even tolerates me in it. I need not worry about being told to move at any given moment. It’s paid off.
Homeownership is part of the American dream (maybe), and it will be that much sweeter when the sacrifice of service is complete. The surest way to it is by saving aggressively, investing smartly, and avoiding debt in the near term.
Did you buy a home while in the military? What other housing options did you use? What was your experience like? 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.]
One other item – it can be remarkably difficult to find a large enough home for a multigenerational family up for rent. We have bought at our last two duty stations because we have 4 kids and a dependent (and sickly) grandma with us. Hard to find 4-5 BR / 3.5+ ba homes for rent, also in a good neighborhood/good schools, also not too far from either of our jobs… On post housing in particular is generally too small and doesn’t have the necessary bathroom arrangements for grandma.
Bought our last home on the premise we would be there my entire ADSO, got moved early, but thanks to the recent housing market made about $200k over a 5 year period. Bought again at our new duty station because we couldn’t find a suitable rental, probably overpaid, but with the proceeds from the last house it hopefully will still net out beneficial in the long run.
We did consider renting out our old house, but the challenge there is that in heavy military markets, the advice about living within your BAH means that the BAH rates put a limit on what “the market will bear” for rents. Add 10% ish for a property manager (since there’s no way I can do that long distance) on to mortgage and taxes, and we were only going to net about $250/mo in profit, and the house had a lot of repairs that were looming that would have eaten into that $250 too. Instead, we got out for a 50%ish profit and no repairs needed.
KFM thank you for sharing your experience and lessons learned. Further: congratulations on your success!
Family needs are the most relevant factors in the discussion, and inform the decision to rent vs. buy vs. live on base. I’ve known several families who needed wheelchair accessible living whose only economical option was to live on base. Others were stationed in a location where there were no available homes on base nor in the rental market that could accommodate special needs. While the math either worked or didn’t, the primary driver of their housing decision was safety. With respect to the “creative solutions” we are capable of conjuring, minimizing the financial risk in housing is no less important for these service members. I am unaware of any additional housing allowance for folks in such circumstances, but will be looking into this issue further.
Dr. Patterson-
EFMP- Exceptional Family Members Program- is the answer to this problem but it is not a terribly career/family friendly one: these families should have all been noted to have the issue- of needing wheelchair accessible housing, or needing to see an asthma specialist every month, or needing in home care of an indwelling cath etc etc. And the answer is often “the family should not be sent to this place where we can not feasibly/ easily provide those accommodations. The soldier/servicemember can go alone without the family or they can find a different work place posting.” I am uncertain of other fixes, since installing a wheelchair ramp/ getting a family one of the few on post homes that have that is much easier than getting a child/ spouse to a distant specialist every month and worrying that if they get sick the local hospital won’t even be the right place for their likely illness.
And of course families hate EFMP- ‘please remove my diagnosis of [mental or other health condition] so my husband can get stationed in Germany’- but there is a reason for it- so many soldiers being returned to the states or moved from Ft Lost in the Woods with a small community hospital to Fancy Med Cen postings after a near disaster, often within months of the initial move.
When we were being assigned they thought my kid having an IEP- individual education plan- in the FL system meant she had limits on what sort of school she could attend. They were unaware it was to flag her as gifted and appropriate for advanced/ gifted programs but calmed down once that was explained. [Sad joke- should’ve gotten it noted as an EFMP issue- so if we are assigned to AL (where we eventually were) the Army has to cover private schools in this environment for her- which indeed was sort of indicated… we’re ‘bad’ parents and Democrats so she went to the public school anyway, and corrected the teachers when she caught their errors]
Another worse issue I hope is improved from my experience in 1993: a soldier is sent to Germany, when they have gotten there they get sent to a prior not yet decided spot and when they have found housing then their family is able to fly from the states to join them. This is very vague for enlisted- officers at least knew the exact post they were slated for. Well, that did not fly for the two of us with a 4 month old nursing baby! We were only allowed to bring her with us because our sponsors agreed to let us claim we would temporarily move in with them on arrival. We didn’t, just paid for a hotel (with a fridge for pumped milk), but the Army didn’t have to repay us for the hotel costs.
Noto bene- our last European tour ended in 2006, my first ended in 1996!
When you are assigned overseas, you might have the chance to live off post. Research if possible ahead of time the setup for rental payment. It might well be direct from the US military to the landlord, even at insanely inflated prices since you need a place to live, and might be massaged to cover things that would usually come from your own pocket in the US. When we were in Germany in the 1990s we got the Army to pay our landlord an extra couple hundred euro per month and then we had no utilities to pay. I don’t think we would have received any allowance for that from the military. We can’t recall how we located the house, perhaps looking in newspaper ads. Of course the military will have to ensure the landlord has no history of discrimination.
On exchange in England we lived in British military housing. The Brits based housing size on rank alone, so at spouse’s LTC rank with two kids our house was much larger than that for a British lieutenant or captain with four kids. And the brigadier general whose kids were all out of the house had five bedrooms. It was still insanely small by American non-NYC standards. A few US officers seemed to inherit the off-post charming house and yard from the officer they were replacing, but we were unable to lobby for starting a new relationship like that. Living on the British post was another interesting aspect of the exchange experience, but those living off post had an even more varied exposure to local culture such as we had in Germany. I had to venture out to get that myself, and was happy to do so. (I wasn’t active duty at that time. Any spouses or partners who want to know about practicing medicine in the British system should contact me.)
In both situations, while they loaned us furniture to include garden tools, there were insane limits. In Germany, we were issued two book shelves only because we were both officers. Most families only got one. This led to me later reactively purchasing the dozen now covering most of the walls in our subsequent homes.
We purchased houses twice. Luckily we got to stay in one for four years, and this one now with exiting the military going on 17. I certainly didn’t make any money the first time buying a house, selling it for about the same price four years later minus realtor fees etc, however I could not possibly have rented the six acre farmette of my dreams for any price, and I considered the mortgage payments and lost realtor and repair fees a reasonable rent for that experience.
None of our friends who left homes and rented them out are glad they did so, except the few in my spouse’s aerospace / flight doc community who always get back to Fort Rucker who rented out homes between returning to them in Alabama. However over a full military career you might want a larger house at the end of it than you purchased earlier on! Or you might be like us and wish you hadn’t accommodated all your kids so comfortably once they have all flown the nest.
“Keeping the perspective that housing is a consumable and that military service isn’t forever insulates you from bad decisions.”
This is great advice. I’m feeling the itch to buy for the first time during the next PCS.
Would love to see an example of the transaction costs, taxes, ect compared to mortgage principal paid during a 3 year assignment.
I mostly disagree. It’s certainly true that, just like anyone buying a house, service members need to be smart–don’t buy more than you can afford, it depends on the area, be careful when the market might be overheating, etc. But when it does make financial sense, and it often does, service members should be actively encouraged to buy.
I used to be active duty and wrote up wills for hundreds of service members, which involved learning about all of their assets and liabilities. In that time, I saw fewer than five people who had any significant assets, and for those few people it was at least partially in the form of home equity. The vast, vast majority were on a trajectory to leave military service with nothing to their name except maybe a retirement check (which is pretty paltry for most retirees, although I don’t think most people realize that).
On the other hand, my husband and I are one of the “success stories.” We each purchased a home in SoCal with a VA loan with about 10% down. Both were very modest homes that were well below our means. BAH more than covered the mortgage, which left us with extra tax-free money every month. Both homes are on track to double in value within 7 years of purchase, leaving us nearly $1 million in appreciation alone. They’re both rented out for a decent profit right now while we live in an area where it doesn’t make sense to buy.
There are plenty of areas where we could get stationed and would absolutely not buy a home. It’s worth getting smart on and running numbers on mortgages, rents, transaction costs, and what the market looks like for renting a place out. But I definitely wouldn’t discourage people from exploring the possibility.
Mrs. FCB, thank you for your perspective, and well done with your real estate investments (particularly in southern California). And especially, thank you for your service!
It saddens me to hear of the many service members you worked with who were without meaningful assets. I would hope that some of this might be due to their relative youth and modest income. Unfortunately, I suspect that financial illiteracy, poor savings rates, and consumerism were common drags.
There is a way to win financially in the military, particularly in the long term. And I would add that the pension/annuity is a better safety net/benefit than nest egg. It is inflation-adjusted and never runs out before you do. I will be posting more on this later.
You also point out, accurately, that incredible success can be found [stumbled upon?] in real estate whilst serving. Duty location, market conditions, and a variety of factors well out of one’s control come into play. Sometimes strong and valid arguments can be made for buying, and it can work out well in the end. It can also end in financial catastrophe. In my experience, the quiet “break-evens” and losses outnumber the more vocal wins, and those who have bought tend to look back with either regret or ambivalence. I’ve no hard data to share on that (that would make for a fascinating study…).
Nuance thrives in this issue-many factors to consider. I would posit, though, that generally speaking for active duty servicefolks, buying is a greater risk to wealth building than it is a tool to reach financial independence.
I agree service members should strive to do better than just their retirement check, but I wouldn’t call those paltry… Worst case scenario (E6 with 20 on the new blended system) you’re talking about $20k/yr for life, increasing with inflation/future military raises. Not enough for most people to stop working, but most 20 year military retirees will be 38-40 years old and that extra $20k is enough to let them take a less lucrative job or risk starting a business. Put another way, assuming 3% withdrawal rate (since it has to last a longer time), that is $600k and equivalent to walking away with more in savings than an average 65 year old.
For docs specifically, worst case scenario (O5 with 20 instead of O6) translates to $47k/yr starting at age 46ish, or approximate equivalent of about $1.6M. Again not enough to cover all expenses for most physicians, but certainly not “paltry.”
A military benefit still worth thousands a year- and if you are or end up with a severe or chronic illness even more- is Tricare! Getting a job and earning the money the pension gives spouse would be easy- getting one that provided health care, not quite so easy especially if he weren’t going for physician jobs or just wanted pick up locums work. We figure Tricare is the main reason we are FI- the pension we could make up for with parttime jobs, but so many folk who won’t go naked (without health insurance I mean) are chained to jobs which provide it until they can get medicare.
A judicious purchase of home with intent to rent when you PCS can reap significant rewards. I did with one home in Jacksonville, FL, which all in all, netted me $550K over 20 years. In retrospect, I could have selectively purchased other homes which, at the time thought about but never pulled the trigger, would have collectively netted me 7 figures. Opportunities abound and can be easier with BAH funding as long as you have future appreciation in mind