Military Landlords Could Get a Pay Cut in the 2015 Defense Bill
by Karina Gafford
If the entire military were to suddenly receive a net pay cut of approximately 1-percent, what impact would that have on your rental property, Mr. Military Landlord? If you are Active Duty, then not only would you receive a net pay cut yourself, but also you are likely to have no wiggle room to either increase rent on your property near a military installation next year; in fact, it is more likely that you will have to decrease rent to better reflect the BAH rental rates in your area. When this effective pay cut is compounded by increasing inflation rates that you’ll face when paying for regular maintenance and upkeep costs that pertain to your home, your total net annual pay from work and your rental properties may look a little unhappy next year.
Before you correct me, yes, I understand that the military is not to receive a direct pay cut. In fact, the recent projection from the Defense Authorization Bill suggests that a 1-percent pay raise, as per the suggestion from the White House, is likely to pass. This is good news for service members. However, that same bill also suggests a cut to the commissary and to the military basic housing allowance (BAH), which is likely to reflect a sum total of 5-percent.
The Military Officer’s Association of America (MOAA) has been campaigning against these cuts. They suggest that the cuts to the commissary alone with will cost the average military family of four "nearly $3,000 in commissary savings per year." Given that this figure has been disputed and that not all families choose to shop at the commissary, we won’t take this figure into our calculation when determining whether the military is receiving a pay cut. As for the housing cuts, MOAA cites that "Under the proposal those currently serving will be required to pay 5 percent out-of-pocket for their housing. On average this will penalize a military family by more than $1,200 a year." At $1,200 per year, the average military family stands to lose an average of $100 per month.
For the purpose of this exercise, we will look at a sample of an O3 with dependents in Arlington, Virginia, whom we will call Jack, and an E6 with dependents in San Diego, California, whom we will call Billy.
Jack - O3 with Dependents in Arlington, Virginia
For an O-3 with 9 years of service, Jack’s base pay is $5,687.10.
A 1-percent base pay increase would amount to an additional $56.87 per month for a total of $5,743.97 in monthly base pay.
Jack’s BAH with dependents rate for Arlington, Virginia, is $2,781.
A 5-percent cut to BAH would amount to $139.05 for a total BAH rate of $2,641.95.
The difference between Jack’s 2014 ($5687.10 + $2,781 = $8,468.10) and 2015 ($5,743.97 + $2,641.95 = $8,385.92) pay would amount to $82.18 per month.
Jack would thus lose $82.18 per month, or approximately 1-percent total.
Billy – E6 with Dependents in San Diego, California
For an E-6 with 10 years of service, Billy’s base pay is $3,331.
A 1-percent base pay increase would amount to an additional $33.31 per month for a total of $3,364.31 in monthly base pay.
Billy’s BAH with dependents rate for San Diego, California, is $2,226.
A 5-percent cut to BAH would amount to $111.30 for a total BAH rate of $2,114.70.
The difference between Billy’s 2014 ($3,331 + $2,226 = $5,557) and 2015 ($3,364.31 + $2,114.70 = $5,479.01) pay would amount to $77.99 per month.
Billy would thus lose $77.99 per month, or a little less than 1-percent total.
If you rent to military families, this could cost you approximately $1,000 per year in rental rate losses if your rental rates reflect local BAH rates. For servicemembers who will both lose what MOAA cites as an average of $1,200 per year on their own housing allowance and who will lose approximately the same per rental home they own, these net losses will quickly add up to eat into savings and basic pay.
This net pay loss calculation does not also reflect the purchasing power lost by increasing inflation. As of the time of this writing, the latest recorded inflation rates for the U.S. is 2.1-percent. Inflation reflects the fall in the value of the dollar; it is essentially what helps to explain why things cost so much more now than they did ten years ago, twenty years ago, and so forth. A 2.1-percent average increase in the cost of goods and services would only serve to hit military families even harder.
These calculations also do not take into account increasing rental rates. If you have been reading along with our blogs, you will have noted that nationwide rental rates have been increasing. In our blog "Should You Buy a Home This PCS Season," we discussed how three-quarters of US rental markets are reflecting higher rental rates with a national rent increase of 2.7-percent, though some markets showed increases of up to 10-percent in the first quarter of 2014. If you’ve read our articles and blogs on the changing relationship between homeownership and the American Dream for Millenials, the typical age group for Active Duty military members, you will also note that rental market demand is only increasing; therefore, rental prices are likely to increase, too. In my community, for example, it is normal to expect a rental rate increase of at least $100 per year in an annual lease renewal. We expect to receive this from our landlord early next year.
What these calculations do not take into account, however, is that fact that those currently receiving higher BAH rates would be grandfathered in to those rates, and would thus continue to receive the higher rate. Therefore, while we would not expect an increase in BAH next year as per previous years, we would continue to receive our current rate. As a result, the only impact to our family’s budget would be a 1-percent base pay increase, yielding a net pay gain for the year. If, however, we PCS, we would receive a BAH rate of 5-percent lower than we would have for an O3 with dependents who arrived on station in 2014. With a projection of a lower BAH, we would plan to either buy or rent for less than what we otherwise would have paid. Whether rental markets surrounding military installations will reflect lower rental rates as a result remains to be seen.
To stay up to date with what is happening in news that relates to military homeowners, renters, and those who rent to military families, make sure to read our blog on 5-Percent Cut to BAH on the Table for more information on the Defense Authorization Bill of 2015 and sign up for our newsletter on our homepage.