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.]