Being in the military presents unique challenges. We are burdened with moving every one to three years throughout our careers. While moving that often can be exciting, it can wreak havoc on our finances.
While I think most people make mistakes with real estate, those mistakes are magnified in the military because of frequent moves, especially when sent overseas.
Today I address the two biggest mistakes I see military members make with real estate. First, buying in high cost of living areas. Next, buying a home at each duty station. Both bad ideas.
Let’s take them one at a time.
Buying in a High Cost of Living Area
I just ran into this issue a few days ago. Somebody told me they were moving to Hawaii and everybody told them they have to buy because the prices of houses just keep going up! They usually say things like, “you can’t lose!”
I told them, don’t buy! Whatever you do, don’t buy in Hawaii!!
Why would I say that? Don’t I want everyone to be Rich on Money?
They sighed and remarked that I was the first person to tell them they shouldn’t buy in Hawaii.
Clearly, I don’t know what I’m talking about.
There are two problems with buying in high cost of living (HCOL) areas. One is the appreciation myth, and the next is cash flow.
The Appreciation Myth
There is a wide-spread belief if you buy in a HCOL area, you can’t lose because you’ll get massive appreciation, and even if your rent doesn’t cover the mortgage, (which is likely) you’ll still come out ahead.
Here’s the problem with that thinking. Appreciation is a fickle thing. In HCOL areas, it sometimes comes in spectacular fashion for a few years, and then disappears for several years. Those spectacular years are what get people’s attention, but you never know what years that will happen, where it will happen, and how long it will last.
In the end, appreciation in HCOL cities usually ends up being only slightly better the appreciation in any other city in the U.S. For instance, Honolulu may see a 4% appreciation per year on average over the long term compared to 3% for most cities.
I’ll give an example of the appreciation myth from my life. I bought a townhouse in Washington D.C. for $280,000 in 2003. Two years later it was worth $400,000. I was ecstatic! I could only imagine what it would be worth in ten more years!
I sold that house in 2016. How much did I get for it?
$400,000. All my growth (appreciation) happened the first two years, and then a net of no growth over the next eleven years. This works out to less than 3% appreciation per year.
You can’t count on appreciation when you buy in a HCOL area, especially in the military. During the one to three years you are there, it could easily stay flat or even go down in value. That would not be a good thing on a million dollar home!
Read my full article on The Appreciation Myth
If you buy a property at an assignment and realize it didn’t appreciate much, you made need to rent it out instead of selling it. Maybe your plan was keeping it as a rental anyway.
Rental properties in HCOL areas almost never work out!
Well, we know the first reason is because of the appreciation myth. It’s also because the numbers don’t work!
Let’s talk about the 1% rule. It’s the most basic and important rule in real estate investing.
The 1% Rule – A house should be able to rent for at least 1% of the acquisition price. This is purchase price plus fixing it up.