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When you're in the military, it's normal to move often, so building wealth in a house that you’ll have to sell in two to three years can be hard. That’s why many military members plan to buy a home with the intention of renting it out in the future. It’s a smart investment strategy if you’re prepared mentally and financially. Not only does buying a house as a future investment provide financial stability from passive income, but it can also help you build equity over time.
So, from the get-go, consider homeownership a real estate investment, whether your purchase is to put a roof over your head or someone else's. Cue the term, rental property.
What Military Homebuyers Should Know About Rental Property As an Investment
Rental property investments can be a fantastic way to create passive income for military families. However, there’s an art to it, and it requires you to think beyond your family’s specific needs when buying a home and look more objectively at the property’s functionality and aesthetic.
Thanks in large part to access to the buyer-friendly VA loan, there’s a lot of interest in real estate investing among military members, but you can’t successfully invest without knowing the ultimate goal for the property. The reason why you buy will help you make the right purchase. These are common ways military buyers invest in real estate.
Standard Rental Property
One of the most typical ways to generate passive income through real estate investing is to purchase properties and become a landlord. You may live in the property first, then convert it into a rental property when it's time to PCS. Or, you can buy a property separate from your home that you intend to market to renters as the first occupants.
Rental properties provide a steady income stream through monthly rent payments and appreciate in value over time. As a military buyer, it makes sense to consider purchasing properties near military bases because you’ll have a constant pool of potential tenants.
Another strategy for generating passive income is to fix and flip properties. This process involves purchasing a distressed property, making repairs and renovations, and then selling the property for a profit. While this strategy is more labor-intensive than rental properties, it offers higher returns in a shorter time. However, be careful; flip projects are hard to manage with a full-time career as military personnel, especially if you live long distance.
A long term buy and hold strategy includes purchasing a property with the intention of holding on for an extended time, like until military retirement. You would plan to rent the property to earn a passive income stream and hold onto it until it appreciates, ultimately selling it for a later profit. This strategy is probably less involved than flip properties and could offer a more consistent source of passive income over time.
When considering these different strategies, weighing the potential risks and rewards is essential. You should always work with real estate and financial professionals before making any decisions. They’ll help you develop a plan that aligns with your investment goals and risk tolerance.
Read these blog posts to learn more about real estate investing:
Tips for Buying a Home When You Plan to Rent It Out Later
1) Prepare your family's short list of home needs.
Keep in mind the distinction between "needs" and "wants." A three-bedroom home accommodating parents and four children is a legal need (most states only permit two kiddos per room), while quartz countertops are a want. Your casserole will taste just as delicious when served from Formica countertops!
Needs and Wants only merge when they’re essential to making your home competitive as a rental property rather than selling. For example, minimizing high-end upgrades when possible is preferable to keep your long-term replacement costs down.
Possible upgrades could include:
- Updated primary bedroom suite. Renters and home buyers love a lux getaway retreat.
- Two or three additional bedrooms to accommodate family and guests.
- Home office. A dedicated work-from-home space is a must-have for some renters and buyers.
- Garage. From auto maintenance to an in-home gym, a generous garage is a big plus.
- Outdoor living space. Extend your living space outside with a beautiful patio, or secure the family and pets with a fenced yard.
Although it’s fun to dream of a grand estate, keeping your list of needs somewhat short is a good idea. By focusing on the basics, you can keep your options open and buy a home that’s both good for your family now and for your family’s long-term needs as an investment property.
2) Do a little homework.
Again, looking beyond your family’s needs, you’ll want to find a house in a neighborhood that will interest other families and serve them well. Your research should include police reports about crime and feedback from other military families in the area. Everyone knows someone from somewhere! Use the incredible military community to network and find the best fit for you.
Here are a few things to look for. They overlap owner and renters' needs.
- Proximity to base
- School district
- Nearby playgrounds or pools
- Walkable destinations
3) Run the numbers.
Now, the biggest question is, can you earn money as a rental property?
“For most homeowners who decide to rent their property, one of the biggest questions is how much to charge for rent. Yes, the mortgage has to be covered, but there’s so much more that goes into the formula. Taking into account several factors changes the rent per month payment significantly. Smart owners budget for many circumstances.” — A Guide for the Unexpected Military Landlord
Here is a list of things to calculate:
- Mortgage rate
- Interest costs
- Insurance costs: Besides your basic homeowner's insurance, insurance payments will most likely increase from converting a homeowners policy to a rental property.
- HOA fees
- Higher tax rates for investment rentals
- Property management fees
- Maintenance (roughly one month’s rent is a good place to start)
- Basic Housing Allowance: Calculating your BAH won’t prove helpful as you’ll likely be on to your next duty station when renting out the property. But it’s a good idea to know the average BAH, given that military renters will probably be your market. Use this BAH Calculator.
If, based on the market analysis you’ve conducted, you can’t cover your costs, then buying a home and rental combo this time is not necessarily the best option for your military family. At the very least, you’re looking to break even as you’ll have this property’s expenses plus those of your primary residence (after your next PCS) to foot.
If that’s the case, then rather than investing in a home right now, take some time and add to your savings. Then, at your next military assignment with a different market, you’ll feel more prepared to buy a house you could later lease.
But, if all signs point to Go!, then read on for more information about how to manage your rental property.
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4) Research property managers.
Imagine if military orders arrive for Norfolk, Virginia, but you also own a home in San Diego, California. Immediately, you start to think about what to do with your house—sell or rent.
If you choose to rent your home, you’ll need to make a few arrangements. Before you move across the country, it’s good to have a point of contact for any repairs that might come up. Rather than you managing issues like a running toilet from thousands of miles away, a property manager nearby can be the helping hand you’ll most likely need.
Ask your real estate agent for recommendations and check out MilitaryByOwner’s business listings for property managers in your area, as well as online reviews of property managers in your community.
Our free ebook, PCS Ahead: Should I Rent or Sell My Home?, will help guide your decision on whether to rent or sell.
5) Select a list of no less than five property managers to contact.
Though you might find a property manager who looks ideal, they may not be a good fit for you based on their cost and operational models or because they’re simply not accepting any new clients. You should also expect that at least one of the property managers won’t respond to your inquiry.
Another may not have sufficient answers to your questions, and you may not get a good vibe from another. Remember, you’re planning to entrust one of your greatest assets to this person, so if you don’t have a good feeling about it, trust your instinct and move on; you’ll find someone else.
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6) Weed through the responses.
How the property manager responds to you directly reflects how they’ll respond to your prospective tenants. Keep an eye out for the following:
- Timeliness. You don’t want your home sitting on the market and losing money because your property manager isn’t efficiently responding to inquiries.
- Repairs and maintenance. “Some property managers request a reserve fund to use to make necessary repairs or maintenance around the property without consulting you first. The fund is usually somewhere between $250-$500. Once depleted, the property manager must contact you for additional expenses. You’ll also want to set a maximum amount for one purchase. For example, even if there’s $500 in the fund, the property manager would need to receive your permission to spend it on one item.” — 3 Things to Know Before You Hire a Property Manager
- Communication skills. As a landlord, you are ripe for lawsuits. So make sure you have a property manager who communicates firmly and clearly to avoid misunderstandings between you and the tenant.
- A market analysis. Does the property manager know what types of homes are in the highest demand? Discuss the market, trends, and the renters’ needs. What inquiries do the managers receive, and what regular requests do they find hard to fill?
Pro tip: Compare the information the property manager and your real estate agent provide. Is the data from the property managers in line with their understanding of the market? If there are major discrepancies, repeat the search process and speak with additional property managers until you find the answers you need.
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Investing in real estate can be lucrative if you take the business seriously (some compare it to a part-time job) and invest the time into working with professionals in tune with your financial plans.
If you think you’re ready to take homeownership to the next level and become a landlord, choose MilitaryByOwner to help you learn the basics as well as some commonly overlooked homeowner/landlord details.
Get more home buying help from start to closing with our series of free ebooks!