The decision of whether to sell or become a landlord is one that many active-duty military families face at some point in their career.
And although the advice about whether investing is a wise decision or not varies — one can find nearly as many top-five reasons online why active-duty military members shouldn’t become landlords as top-five reasons why real estate investing is a wise decision — the reality is, it’s a personal decision best made after a full assessment of the skills and needs of every family member.
For those families who decide to become landlords, Kiplinger.com has some wise tips geared toward military families. The tips are part of Kiplinger’s “Financial Field Manual, a Personal Finance Guide for Military Families,” updated in October.
With a tax-free housing allowance geared to cover all or most of monthly rent or mortgage payments, along with special mortgage programs and tax beaks to make home ownership affordable, investing in real estate — even if just for primary home — makes sense for some military families. Veterans Affairs loans tend to have interest rates that are comparable to other lending agencies but typically allow qualified buyers to do so with no money down. It’s worth keeping in mind, however, that the money that would be a down payment is simply rolled into the mortgage, meaning the amount you owe is higher and, if market prices dip, it could mean more is owed than the value of the home. And although VA loans allow zero down, they may have higher fees than other loan options. It’s a good idea to evaluate all options.
Whether planning to purchase a home as your primary residence or with an eye toward later renting it out, it’s important to keep in mind the property’s future marketability. Can it be resold easily? Can it be rented for enough money to cover the mortgage payment, taxes and insurance, along with a small cushion for repairs?
“Some families try to hold the monthly mortgage payment to a few hundred dollars less than the BAH for someone of similar rank in the area,” a Kiplinger story titled “Smart Home-Buying (and Selling) Tactics for Military Families” states. “That way, they figure they’re likely to have a pool of potential renters who can afford to pay enough to cover the mortgage and other costs (including property management fees) they’d have to pay if they couldn’t sell when they are transferred.”
If that’s the case, Kiplinger.com suggests setting aside at least three months’ worth of mortgage payments, utilities and other expenses in case a tenant leaves unexpectedly. It’s especially important if renting to other military families, for whom the Servicemembers Civil Relief Act, or SCRA, applies. That could mean being left without tenants abruptly if a tenant receives permanent change of station orders while in the midst of a lease.
Military families catch a break if they sell a home for profit after renting it, Kiplinger states. Although civilian families must live in a house at least two of the five years prior to a sale in order to claim tax-free profit on the sale. But military families need only to live in the house two of the preceding 10 years to obtain the tax break. Check out the IRS Publication 3, “Armed Forces Tax Guide” at www.irs.gov.