Real Estate: Be Careful, and Be Realistic

March 30, 2014 | Kate Horrell

I was reading some real estate investing stuff today, and I ran across a stereotypical story:  Military family buys house at each duty station, and makes a fortune either by holding and renting those properties, or rolling over the profits each time they move. (That’s the short version.)  I’m not going to say it can’t happen, because it has.  It could even happen again in the future.  However, I worry about folks that hear these stories and run out to buy a house, assuming that they will have the same success.  Please don’t!

Real estate investing is a constantly changing thing, and the changes that have occurred over the last ten years make it increasingly difficult for investors to make money.  Add in the uncertainty of military life, and you’re starting out with some serious hurdles to success.

In these real-estate-to-millions success stories, there are usually a few common elements:  a family that started with good control of their personal finances, rapid real estate appreciation, and a strong (often growing) military population to support increasing rents.  While individuals can control the first element, the second and third elements are uncontrollable and no longer favor real estate investment.  Real estate values are not going up quickly, even in areas where they are increasing.  Military populations are shrinking dramatically, decreasing the demand for rental property and preventing rents from climbing in military-dominated markets.

Military families can still make intelligent real estate purchases, but the requirements for successful purchase and ownership have changed.  Military families can not assume that their properties will gain value during a typical 2-3 year posting, which means that they need to have multiple plans for what to do with the house when they PCS away.  One of those post-PCS plans usually include renting the property.  This makes home selection even more critical, insuring not only current affordability but also long-term rentability that does not rely upon the military population.   In addition, purchasers must have healthy cash reserves to cover vacancies and those inevitable big expenses that pop up, always when you least need to be spending the money.

I would never tell a military family not to buy a home.  Heck, we own some houses ourselves.  However, the current economic climate makes home ownership a riskier proposition, particularly for military families.  Prospective buyers need to be absolutely sure that they’ve looked closely at every possible scenario and that they have the resources to prevent homeownership disaster.

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Comments

  1. Shari says:

    I'm so glad to see this. Fifteen years ago, friends all around us were telling us these awesome stories of money made, but we resisted because we just weren't comfortable. Now here we are about to retire next year with a nice amount in the bank, in spite of the ups & downs, while so many of those same friends are struggling, have had foreclosures, etc. That doesn't even begin to describe all the horror stories of homes that were trashed, unable to be rented, etc. For us personally, it simply wasn't worth the stress & uncertainty.

    Like you said, it can – and does – happen, and it could happen again in the future. Still, that's an awfully big gamble to take with your family's future.

  2. guest says:

    We are serial property owners, you do have to be careful, but a good property manager and background checks will resolve most tenant problems we've learned. In turn we add 3k a month to our net worth through principle payments on our rentals (and another 1400 a month on our primary).

    We only use 15 year mortgages, buy the worst house in the best neighborhood and spend the time we live there doing a lot of sweat equity. We also keep a years worth of mortgage payments for all houses in cash as a "just in case".

    We use statistical, demographic, and economic analysis each time we move to pinpoint the exact neighborhood to buy in that will give us a decent ROI when we move and rent it out. So far using raw numbers instead of emotion has worked every single time, we've never had a rental empty for more then two weeks and because we revamp them we actually charge a premium over other area rentals. It typically takes me a month to gather all of the necessary data from public sources, and build it out by layer so I can do a buffer analysis. If you want to make a profit in renting, buying the house can in no way be an emotional experience.

    The plan is to sell them all when he retires in 8-10 years and buy our "final" dream house, in cash, there should be over a million in equity by that point in time. We plan to fully retire by age 45 (probably earlier) and being mortgage free is a large part of that, this is just a means to an end in our case.

  3. John says:

    I've really enjoyed reading these comments. It's always nice to see pro's and con's of dealing with real estate. We currently have a home out near Ft. Bragg, NC where we've been renting out since I ETS'd two years ago. I think we've been extremely fortunate to have great renters who've literally been in there since we physically left. I'm not thrilled that I pay 10% to a property manager, however, in the event of something major, it's nice to have some assurance that it will be taken care of, and believe this in an integral part of renting.

    In order to avoid unwanted issues, we were able to price the home at a higher price, which ultimately cuts out potential problems. I think this has helped us out tremendously, and gives us a cash reserve each month, to which we just put away into a maintenance/reserve fund for the house. As of now, it seems to be working in in our favor, and hope that this strategy continues for us.

  4. guest says:

    Here! Here! Jim. I wouldn't say our properties are in good condition when we buy them though, structurally sound yes, but we generally end up gutting all the main components in our time there. They are in excellent condition by the time we put them on the rental market though.

    The property manager is a must for us. I work almost as much as my military husband, and we live (now) halfway across the country from our rentals. That 10% of rent is TOTALLY worth it. In the past year I have heard from my property managers twice, once for the tenant driving through the garage door, and another for the neighbors dog busting through the fence. The garage door was their fault, we picked up part of the bill because of a family situation they were going through but they were responsible for the rest (which we deemed payable over a six month period at no interest). The fence was on the neighbors property so not our deal.

    Little things are automatically taken our of our maintenance budget with them, no issues there. I think most of these horror stories come from people that buy on emotion, without any logic as to what they can afford in their situation, and a complete non realization they may move in 2 years.