Investing in Real Estate: The Inadvertent Landlord
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Sometimes military families unintentionally invest in real estate. You purchase a home at one duty station, and then receive unexpected PCS orders to another duty station beyond commuting distance of their current home. You may not have time to sell your property, or may determine that the housing market has declined and it’s not the right time to sell. Congratulations, you are now an “inadvertent landlord”!
If this has happened to you, you’re not alone. The military is full of families who purchased a house, and then decided to rent it out after their next move. But managing real estate from afar can be a challenge for a family living the military lifestyle. Rather than waiting until you’re faced with the decision, do some homework up front when you are deciding whether to purchase a house—whether or not you think you might someday rent it out. You should approach real estate with the same care you would take before making any investment.
- Housing is shelter. In the military, your shelter needs can be met through:
- billeting in government quarters, barracks or aboard ship (not always available);
- renting a home, condo or apartment; or
- owning a home.
- Owning property (rental or otherwise) is an investment. Like all other investments, real estate involves risk. There is no guarantee you will make money on your real estate. Most markets declined in value significantly during the housing downturn several years ago. Some markets have fully recovered, while others are still depressed. How stable is the real estate market where you are thinking of buying? How will you find out?
- Real estate purchases have significant transaction fees. These may include the real estate agent’s commission, closing costs, title insurance, document fees, home inspections and taxes. Unless you plan to be in one place for several years, or are fortunate enough to buy into a fast-rising market, you may not cover your costs when you sell or rent it out.
Some military families relish the idea of investing in a property and having their tenant(s) pay off their mortgage. But there are important considerations about using real estate as an investment that should be explored thoroughly before you make a decision to invest. Here are a few:
- Real estate is a cash-flow business. Will you be able to collect enough in rent to cover the mortgage, taxes, insurance, property manager’s fee, routine maintenance and emergency repairs? If not, do you have adequate liquid resources to supplement the rent you can command?
- Recognize that Basic Allowance for Housing (BAH) rates will adjust when you PCS. A property that was affordable at the BAH rate where you bought it might be unaffordable if you are transferred to a location with a lower BAH.
- Rental property sometimes idles between tenants. Can you handle utility costs in addition to the mortgage, taxes and insurance, if your property sits vacant for a while?
- Are you prepared to care for your property for an extended period of time? As you PCS around the country or across the globe, you might not be able to visit the property for years at a time. Maintenance needs should not be out of mind just because the property is out of sight. Can you trust your tenants to maintain your property or to at least keep you informed of its needs?
- Will you need a property manager? Management companies often charge +/- 10% of the rent collected. Is this an expense you’re prepared to meet each month? How will you evaluate which management company to use?
- Unlike many other investments, real estate isn’t easy to divest. It can take months or longer to purchase or sell real estate. Are you prepared to cover the costs for an extended period of time?
- Real estate investments sometimes take a long time to pay off, if ever. What are your opportunity costs? What opportunities are you passing up to invest in real estate? Could your money be working harder for you in some other class of investments?
Home ownership can convey advantages beyond just shelter. For some Americans, building equity in a home is one way to build wealth. Just take care that you don’t become an inadvertent landlord.