Military members should not make these deadly real estate mistakes.
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?
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.
Example. If you buy a house for $80,000, and spend $20,000 fixing it up, your acquisition price is $100,000. That means in order to pass the 1% rule, this house should be able to rent out for 1% of the price, or $1,000 a month. If it can rent for this or higher, it would potentially be a good rental. It would have a good return on investment (ROI).
With the 1% rule, the return on investment (ROI) is roughly 6%. If you don’t pass this test, your rental is making less than that.
For more info about the 1% rule and accurately calculating cash flow, read my article on How Much Money Will I Make From my Rental Property?
Passing the 1% rule is almost impossible in HCOL areas. The houses are too expensive, and rents too low. It’s a poor place to have your money tied up. In many cases, you may be better off renting, and saving up towards a future downpayment.
Example. Let’s use Hawaii again. Finding a house for $900,000 is pretty likely. According to the 1% rule, you’d have to get $9,000 for rent to make that a decent rental property.
Surprise, surprise, you can’t even get half that. Maybe $4,000. It doesn’t even come close to passing the 1% rule.
It’s a horrible investment. If you buy this property and move away making it a rental, you are making little money or even losing money each month.
If you decide to sell after a few years in Hawaii, you might not have enough appreciation in that short time frame to sell without a loss. Buying is a losing strategy.
Also remember, just because your rent covers your mortgage doesn’t mean you are making money. There are lots of expenses in a home that are paid after the mortgage payment!
But I get great tax benefits!
The tax benefits of owning a house are largely overblown. Suffice it to say, it can make a crappy investment slightly less crappy, but it doesn’t turn a bad investment into a good one! Make sure the house you are buying is a good investment before considering taxes.
Buying a Property at Each Duty Station
This is a big one.
Everybody either knows somebody or has heard of that mythical military figure who has made it big and hit the jackpot by purchasing a property at every duty station, turned them into rentals when they moved, and retired with several rental properties that cash flow well and have appreciated massively in value.
Now they jet to the Bahamas on private planes and party on yachts eating caviar and sipping pina coladas all day.
Maybe that’s an exaggeration, but you get the picture.
Buying a house at each duty station is a horrible idea.
The chances this strategy will make you rich are 1 in 100. The other 99 have you breaking even to losing money over the long run.
There are three problems with this strategy. Cash flow, appreciation, and management.
This is the same problem we saw above in HCOL areas. Some cities are much better for rentals than others. To take that even further, once you’re in a city, some neighborhoods will make much better rentals than others.
If you buy a house in a neighborhood that is new or newer, has very good schools, and is considered upper-class or higher, these neighborhoods usually end up not meeting the 1% rule. My advice is, you can live there, but don’t buy there. It will make a poor investment.
I’ll use myself as an example here.
When I was in Montgomery, Alabama for an assignment, I knew the neighborhood I wanted to live in. It was a gated community with a clubhouse and pool, newer houses, low-crime, great schools. The houses could be purchased for about $179,000, but could only be rented for about $1,300. They didn’t pass the 1% rule.
I rented that home instead of buying.
Now here’s the important part!
In the same city, however, I was able to purchase a house in a more middle-class neighborhood for $45,000 that rented for $800 a month. I bought this house not to live in, but purely as an investment.
Actually, I own 20 houses in Montgomery. If you want to know more about that, read my Guide to Conservative Real Estate Investing
You can’t just buy a house at every station you end up at.
Whether or not it makes sense to buy a home while in the military depends on if that house will make a good rental when you move away. If it doesn’t pass the 1% rule, it probably won’t. I would suggest renting instead.
Same problem as in HCOL areas. You’ve seen in the media or heard friends talk about the huge money they made from appreciation. You need to consider these as unique cases. This may or may not happen to you in the location and over the time frame you own your homes. Most people I know have seen far more modest appreciation over the long term. Don’t count on large appreciation. If I happens, great.
I have 20 rental properties and they are all in the same city. I had one management company that handles them all. It took me a long time and a lot of work to get a great management company that I trust.
I know lots of unhappy military landlords that have serious problems with their management companies. I also know many who are trying to manage properties themselves and doing a horrible job.
By the way, picking the best property manager is tricky business! Don’t get ripped off.
Click here to get a PDF of my tips on finding the best property manager.
Getting property management right in one city is hard enough. If you think you’re going to get it right in five, six, or seven different cities, you’re dreaming. Finding good contractors, real estate agents, and management companies are rare things. Spreading yourself out that thin doesn’t work very well, IMHO. I think it’s best to concentrate your portfolios in as few locations as possible.
Here’s an entire article I wrote on 5 Secrets to Finding the Best Property Manager
So there you have it.
Two deadly real estate mistakes I see all the time in the military. Buying in HCOL areas, and buying at every assignment.
I hope you can avoid it.
Of course, some people will feel like buying is always better than renting, because renting is throwing money away. This is not the case. In many situations, renting can be financially smarter than buying.
Read my page on buying vs renting
Anyone disagree that buying in HCOL areas or buying at every assignment is a mistake?
I want to hear your comments!
Rich on Money
It’s not always just real estate…
Read The 5 Worst Financial Mistakes to Avoid for Military Members
32 thoughts on “Don’t Make These Mistakes in Military Real Estate”
Hi Rich, another good post and the benefits of renting are often overlooked due to “everyone” hyping the benefits of ownership. Your 1% rule is a great tool to prevent a mistake. However, what are your thoughts on this particular scenario.
We bought in Houston and planned on staying there a very long time, at least five years. Therefore, we bought a house, modernized (everything is new and top quality) and it’s an extremely comfortable home – all in cost about $320k. We put in a hefty down payment of $60k.
Of course, less than a year later, long story short, I get an opportunity to move to MT – our dream come true, living rural but not remote. We live right near Bozeman. [ Side note, its called Boze Angles due to all the Californians moving and the RE market is crazy. Of course we are renting.]
If we sold our Houston home, we could maybe sell it for $310k so after commission etc we would take a $20 to $25k loss, easy. Therefore, we decided to rent.
Key point, I secured a top notch mgmt. company. The property was rented within ten days practically at asking price, listed at $1950, rented at $1900. After all fees, we net $200/month.
Of course this property does not meet your 1% rule. However, the return of equity is at 4%. I know that this is far less than S&P 500 return. However, if we sold we would take a serious loss. Also, I have not taken into account tax benefit and depreciation.
Therefore, if you were in this situation, what would you do – sell and take the hit, keep renting or a different option?
I look forward to hearing from you.
I think this type of situation is very common in the military, but precisely what I hope people avoid with this particular article. By keeping the house, you tie up a large mortgage and a $60k downpayment for a measly $200 a month. On top of that, i would argue most people tend to overestimate what their positive cash flow is on their houses. I urge you to REALLY do the math and get out the calculator and make sure you aren’t more breaking even or even losing money by renting this house out, as many people do while still telling themselves they are making a few hundred a month. The next most important rule to the 1% rule is the 50% rule. It means approximately 50% of your rent goes to expenses, the rest is your profit. If you take that into account, are you still making any money? If you feel like 50% is high, 40% is certainly not. Try that.
Since you’ve owned the house for awhile, you’ll be able to calculate most of your actual expenses. The trickier expenses to calculate are capital expenditures (future expensive repairs) and vacancy rate. Use my article as a guideline for calculating what you are actually making https://richonmoney.com/how-much-money-will-i-make-from-my-rental/
After you calculate this, let me know what you come up with.
Thanks for putting this out, Rich. I see so many people falling prey to these myths and losing buckets of money. Sadly, some of them don’t even realize they are losing money, because “but it’s going to appreciate!” is a 100% truth in their heads.
Some more examples for you from my own experience:
1. I bought a house that appreciated 65% in the first 6 months I owned it. AMAZING, right? I was able to get that incredible deal because I bought a short sale at the bottom of the market in a great area at the end of the buying season. So the following year as people were moving in and the neighborhood finished building stores that had been delayed due to the Great Recession, I was perfectly poised . But in the 6 years since then, it’s only gone up another 15%. Overall that’s still huge *average* appreciation, but it shows your point about not being able to predict appreciation periods. And since I still own this house, I’m subject to any stagnation and yes – depreciation – that could still happen.
2. I just moved to a new duty location where most people buy. I know quite a few people who bought here in the last decade. But they bought based on being able to cover the mortgage with their BAH in, say, 2013. That already indicates that a renter would not be able to cover the full cost of being a landlord using a similar BAH (mortgage + vacancy + repairs + management). Worse, BAH has been going down. It went down about 8% last year! So when those same friends were asking if I wanted to rent from them, they were offering houses where the rent alone (no utilities) was $300 more than my BAH. Why? Because they bought houses they wanted to live in, not ones that make good rentals.
Unfortunately we all heard the same myths early in our career, and saw the same Major who always carried around $1000 cash because he was “so rich” off his rentals. Of course, that was in 2006. I wonder if he would advise Lts and SSgts the same way today.
You gave some great examples. I appreciate the AGREE STRONGLY. It sounds like you had some success in real estate, but you keep it all in perspective.
Thanks for the private email and since I’m no longer on active duty, this question needed to be asked on a different post.
Regardless, thanks for clarification that in the 50% rule only the interest and insurance is part of the cost not the principal.
Keep up the great posts.
I just deleted my post advocating for buying a rental property at every duty station, so I guess I agree strongly! You had previously replied and pointed out that this strategy usually didn’t make sense, but I had forgotten to go back and delete it. Now…it is gone!
Thanks for the great post. I’ve chosen not to invest in real estate but I still get tempted every now and again and enjoy reading about it.
Thanks for the comment. I’m glad I was able to sway your opinion a little. Keep up the blogging!
I would like to hear your thoughts on this hypothetical scenario…
I buy a house in a stable area with great schools for $200,000 (somewhere in the Midwest like McConnell, Scott, Little Rock). The area rents for $1400 a month.
When I PCS three years later, I will have payed off roughly $60,000 of the loan with my BAH and some additional contributions. When the house becomes a rental, I will owe $140,000. In theory, the house passes the 1% test by the time I PCS. I realize there are lots of variable to this scenario, but what are your initial thoughts?
It’s a good question. If you had to use $60k of your own money to pay it down that could have been invested elsewhere in order to make it pass the rule, you’ve already diluted your ROI. That $60k should/could be working for you in some other way. This would still be a poor investment. Another point is, not very many people are going to pay down $60k in 3 years. If you look at an amortization table, only about 15% of your payment is coming off the principal at the beginning of the loan. You are mostly paying interest the first several years.
I am adamant about reaching FI by the time I retire from the military. I have always believed in the mysterious member who purchased a house at every duty location and thought I would do the same. After reading your post (and the comments), I have reservations about this fairytale. However, I find it hard to believe I can reach FI by 45 without utilizing the power of real-estate.
Do you believe military members can reach early FI without real-estate in their portfolios?
Outside of real-estate, where do you recommend members invest their money after maxing out ALL tax advantaged accounts. (Maybe a simple Vanguard brokerage account invested in VTSAX?)
What are your thoughts on withdrawing money from tax advantaged retirement accounts before age 59.5?
(… your blog is fantastic, keep the posts coming! It’s such as great resource to send other military members to when discussing personal finance… Thank you!)
Kyle, you ask a really good question here. I would say yes, I do believe you can reach early FI without real estate, but there is a caveat. If it’s invested in the market, and that particular 10 years happens to be a bad 10 years, then being in real estate would have been faster. There is no way of predicting when that particular good or bad 10 year period will be in the market, so it’s a crap shoot. I’m invested in both real estate and the market. My entire TSP (military 401K) is invested in something similar to total stock market index with some international exposure as well.
Of course this is not true investment advice, but I will give my two cents. You can have an account at Vanguard, Fidelity, or Schwab in a low-fee index funds. There are many different ways to invest, and I have a cool link that allows people to choose for themselves. I’m a fan of having like 3 funds total, but that doesn’t mean I’m right!
There are ways to withdrawal from tax advantaged retirement accounts before 59.5, but I say don’t do it. Here are some of the rules, but they don’t seem like things I’d want to do. Let that money grow.
Buy in an HCOL area and you get orders to a LCOL area with no renters for your other house…now what? BAH dropped dramatically so you better have savings haha that’s what I tell people….
Our Tampa house definitely doesn’t meet the 1% rule boo. We bought it thinking we would come back to it in 9 years when my husband retires. But now since moving back ( I am from Tampa) we have decided this isn’t the area we want to retire too. Our BHA here is over $2,200, the mortgage is 1,200 rent would be about 1,800-2,000. That’s about 1,800-1,200=600*12= $7,200 a year x 3 years =21,600 plus our mortgage is paying off our home loan at an average of $400 over the next 3 years so that is another $4,800 a year x 3= 14,400. That totals 14,400+21,600=36,000 that different between rent and buying should more than cover the 6% sales fee (if that) of 18,000…
I just read the comment above by Kyle.
I thought I’d add my situation we paid $225,00 for our house and put $48k down and have paid another $37,000 on principle since March of 2017 when we bought the house. If I wouldn’t have put that 48k down on the house yes it COULD have been invested in the stock market but I wouldn’t put it in the stock market so it’s not even in my equation. When we get orders we will owe $120k on the house and could rent it out for 1900-2000 what would you do in this case? Location is South Tampa about 1 mile Macdill AFB.
Jen, You’ve owned the house for awhile. The 1% rule is a good rule to use before you buy. Once you’ve owned for awhile, you don’t need that rule anymore, you can use actual expenses to find your actual return on investment. Bottom line is you bought the house for $225k, but it rents now for $2000. It doesn’t quite meet the 1% rule, so probably not an awesome cash flower, but is it worth keeping or selling? If you read my article I link to below, you can see how to add up all your expenses, subtract that from total rents, and figure out what your actual return on investment is. You need to subtract things like vacancy, taxes, insurance, interest, future capital expenditures (expensive repairs) etc. Once you’ve done this, you decide if you are happy with this ROI, or if you are better off selling the house and doing something else with the money, either a better cash flowing house, or a different investment altogether. https://richonmoney.com/how-much-money-will-i-make-from-my-rental/
Ok I’ll check out the article. I am wondering what will happen to property values in my area that seems to be where the moneys really at. A double lot like mine 100×150 just sold for $230k last month (in my neighborhood) and the house was demolished. Prices have risen like crazy since buying in 2017. I’m wondering what the value will be at in 10-15 years from now but that I wont really know until then…
Appreciation isn’t necessarily where the money is at. It comes and goes. It may raise quickly over a period of a few years, but then stay flat or even decline over a long period. I’ve written about appreciation in other blog posts.
So if you’ve already bought somewhere that looks like it’s 60% expenses including $200 a month for inevitable repairs and the rest to equity and minor cash flow, would you just sell and cut your losses when you move? $0 down so I don’t have a lot invested in the house and would probably break even if I sold with the current expected timeline. The way I see it is a couple thousand at most is tied up in equity when I leave with about $4500 that would go toward principle the first year and so on. I realize it won’t have great cash flow but I never expected that. Also, I’ll most likely be back at this base 3-6 years after I PCS so I planned on moving back in at that point.
Didn’t buy hoping for appreciation aside from inflation, just looking to build equity. Primarily investing in index funds for now but I’m definitely reading your stuff to figure out about purchasing $50-60K houses elsewhere that will be better investments. Wish I’d read all this a couple years ago but better late than never I suppose.
I need to know what you bought for and what it rents out for. How do you know it’s 60% expenses, have you owned a while and tracked it yourself? See my reply to Jen and figure out your ROI.
I’m that Major that bought at multiple duty stations. But I got lucky, and even though I got lucky, now I’m looking for the right time to sell all of them and I stopped doing the buy and rent as I move model. Why did I get lucky? I bought in 2010, 2012, and 2013 in two areas that were hit hard by the recession and have rebounded. Thise 3 have and do well, the forst one I bought was 2006 in amidwest town and if I’m lucky it’s worth what I bought it at. The other reason I have been lucky is that I purposely bought properties that made for a good rental and thus bought much less of a house than I could of compared to my peers. Bottom line is that I got lucky that the market was really down when and where I bought and they rebounded exceptionally well. On a side note I do tell airman now that if they are absolutely sure they want to buy they need to find a house they can afford on a 15 year mortgage. Usually this drives them to rent because they can rent a much better house cheaper than they can buy on a 15 year.
So you are one of the lucky ones! There are also people who bought all their homes right before and during the crash. I did a little myself. While there is skill involved in finding good deals, there is no way of knowing what real estate cycles will do. This is also what keeps me from being highly leveraged, and has me shy away from taking advantage of the VAs option for no money down.
Great post! I just got stationed at a LCOL area (Hampton, VA) where middle class rentals can meet the 1% rule. I am concerned about the population decline census.gov is reporting, approximately 2% in the last 8 years. Is that something new investors should be concerned about? Especially in an area where the military has a big impact on the economy.
Some people try to predict which areas are going to grow the fastest and then buy there. You are sort of doing the opposite. You are hearing about population decline, and thinking about avoiding investing there. I think either method is faulty. The trend of rising or falling population may or may not continue. If you are meeting the 1% rule, and there is a military population in the area, I’d be comfortable investing there.
By far the most informative article. This has proven to be great article for me and others.
Hi Rich, great post. I would agree with finding a sweet spot and sticking with that area as you did. Using myself as an example, I just PCS’d back to Maryland from Hawaii, and I couldn’t wait to check out the LCOL areas here, where properties meeting the 1% rule are far more numerous. Definitely going to ramp up my portfolio here before I even explore other locations. Like you, I value cash flow over appreciation since my holding period strategy is long term. Any thoughts on the softening market as interest rates creep up?
That’s good. Where in Maryland? I thought parts of Maryland are also pretty expensive!
I don’t worry about waiting for the market to soften up. I don’t think about the cycle, or worry about the rate, I just look for good deals.
Yes, a large swath of the state is rather expensive, but there are some pockets of good B to B- neighborhoods (Brooklyn, Essex, etc. surrounding areas) where properties meeting the 1% rule can be found for 3BR SFRs/townhomes.
Good point on always looking for deals regardless of the real estate cycle. Last we chatted in HI, you were considering potentially leveraging debt to increase your ROI. Any potential avenues you’re looking into?
I made some offers on multi-family, but having made anything work yet, we’ll see
I think there is a window of opportunity for real estate investors, in fact, I think that the people that is currently putting money in real estate will see great results in a couple of years when the economy gets back on track.
There’s always opportunities in real estate in any part of the real estate cycle.
When it comes to looking for real estate in Hawaii, one has to consider the high cost of living on the island. The reason for that is that everything has to be imported from the mainland and can be really expensive, so it would be a gamble to make an investment in real estate out on the islands, but not without its rewards paying off in the long run. If I had the chance to buy real estate in Hawaii I would want to make sure that the property that I would buy can pay itself off within a few years through rentals.
Your work inspires me. I am also currently in the military and I am looking at areas to buy property to rent. If its okay with you can I please get some contact information with the same real-estate agent and property manager you use? Also are houses still in the $30-40k range in the area that you buy and have you thought about using companies like fundrise or Streitwise? Both is giving about a 10% return on investment. Do you think this is a good idea?
I’ve been asked that question hundreds of times, and unfortunately I don’t give it out.
I think fundrise and streetwise make a lot of money from people that are trying to do real estate. If you invest with them, they’ll make money and you won’t make much.