A Tale of Two Duty Stations

It was a great time to buy, it was an awful time to buy. Ok, that's the extent of the similarity to a literary work we all had to read some years ago. But now that I have your attention, I'm puzzled at the logic some military people rely on for their purchase decision. We have a large military presence in Hampton Roads, so people often arrive for only a few years, then transfer. When screening prospective tenants for the rental properties I manage, I always ask if they have considered purchasing. Here's a recent response...

"I have no intention of purchasing a home here. We will be leaving in 3 years." Really? Have you even considered the impact on you and your family with all the facts?

• Cash out of pocket. For the renter, assume three one year leases with $25 increase each year. Start at $1,200. At the end of three years, you've paid $44,100 in rent. For the buyer, a comparable house selling just over $175,000 with all closing costs paid and a PITI of $1200/month on a VA 100% loan. At the end of those same 3 years, you've paid $42,000, but let's add 3 years of home warranty so you don't have unexpected expenses if the water heater breaks-just to keep it similar to the renters. You've paid about $44,100. Wow - pretty close to what the tenants paid.
• Future value. Well, for the tenant the future value is zero. They didn't buy anything, so that's easy math. For the homeowner, let's assume a modest 2% appreciation which nets them about $10,700 over the three years. I personally think it's reasonable to expect more than 2% appreciation, but for the sake of argument, we'll keep it conservative.
• Tax advantage. The renters paid taxes on all the money they made, so they get no tax advantage. The buyers, however, were able to deduct their real estate taxes and interest each month, so that's about $30,000 in interest and another $3,500 in real estate taxes for a total of $33,500 that according to the IRS, they did not make so they did not pay taxes on that amount over the three years. If you're able to close before the first-time buyer credit expires, you get a gift of $8,000 from the government-that's not like making an extra $8,000. It is the government paying $8k of your taxes for you, which is like making quite a bit more (how much more depends on your tax rate).
• More opportunities. Homeowners this year can spend $5,000 in energy improvements for their home and get $1,500 of it back as a tax credit. Renters don't have that option so they are paying higher utility bills AND can't do anything about it. It's the homeowners who get the best benefits when the government starts passing out tax advantages.
• Stability. What if appreciation is more than 2%? What if rent goes up by more than $25 a month each year when the lease is renewed? The homeowner knows what to expect in expenses and has the benefit of a rising market, the renter has no control over rent increases and doesn't benefit as house values rise (in fact they are then more likely to have rent increases.)
• Contingency plan. We don't know what the future will hold, so if it's not a good time to sell in 3 years or if you get unexpectedly transferred sooner, you might have to keep the place and rent it out until the market improves. That would mean you've got to rent at the next place you go.
  • Now compare the rental applications of the two people at their next duty station. One has built credit by paying a mortgage and they can say that they own real estate elsewhere. The other has a lower credit score and doesn't own anything of value. Which application do you think is going to get approved and quite possibly be on more favorable terms?
  • Since you're not in the area, you'll need someone to manage your rental while you're gone, so what if that costs you $200 a month more than you are bringing in? Don't you think the tax savings and appreciation during your absence will balance that out if not eliminate it completely?
  • What if you need to borrow some money at some point during the three years you are here? Don't you think you'll have a greater likelihood of favorable terms and loan approval if you are a homeowner with good credit?
• Costs of selling. This is the only one where renters make out better. They have no cost of selling because they have nothing to sell. If the homeowner pays $12,000 to sell their place after 3 years, they have almost broken even - not to mention all the tax savings they retained, the better standard of living they had while in their home, and the ability to exercise more control over their financial future.

So, to summarize..

Now when you factor in the reality that...

1. 1. 1. we are at the bottom of the market
      2. interest rates on mortgages are low
      3. there is ample supply of housing to select from

It seems like a no-brainer. I would understand if someone says they don't want to buy because they are leaving in a year, but if you're here for 3 years, it seems crazy NOT to buy.

This post does not examine all the aspects of home ownership, be sure to discuss that with your real estate agent and consider what makes the most sense for YOU in YOUR situation.

For more information on housing choices in Hampton Roads,
contact Drick Ward, or search for yourself at www.ExitVirginiaBeach.com