Plan an Exit Strategy When Buying or Renting a Home

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In this article: 

• What Is an Exit Strategy When Buying a Home?
• House Hunting When Buying a House to Rent Later
• Forecasting a Rental Home's Maintenance
• Rental House Tax and Insurance Increases
• Exit Strategies for Military Renters

The home buying process is filled with educated guesses. For example, you likely spend a lot of time researching the buying and selling trends in your target neighborhoods and presuming your home-buying journey will be similar to your neighbors. 

 

But as a military member working among many unknowns, you can’t always count on typical real estate trends. This uncertainty is one of the reasons creating an exit strategy before buying or renting a home is a way to feel more confident about your purchase. 

What Is an Exit Strategy When Buying a Home?

An exit strategy is your plan to maximize your investment when you have to leave your home, whether you decide to become a landlord or sell the home outright. The exit strategy you plan will help with reaching your financial goals.

These are typical examples of an exit strategy to consider before buying a home. 

1. Sell the House

You may have no interest in becoming a military landlord and simply want to be free of your current mortgage to invest in another property. Or, your personal finances clearly show that you’ll lose money if you convert your home into a rental property. If the numbers point to selling, consider this your exit strategy.

 

Spend time discussing your intentions with your real estate agent early in the process. They can help you purchase a home that's conducive to a future sale and teach you valuable home selling tips.

 

Here’s help for Choosing the Right Real Estate Agent: A Guide for Military Home Buyers.

2. Rent the Home Later to Tenants

Renting to tenants is a popular exit strategy for many military homeowners, especially if you’re considering buying your forever home to return to one day. However, there are conditions for purchasing a home with this exit strategy in place. Finding a home that you’re comfortable with temporarily and that addresses renters’ needs can be challenging if you must meet a monthly rent income threshold. 

 

One spin on renting to tenants, in case you find out that landlord life is not for you, is a rent-to-own situation, otherwise known as a lease option. This exit strategy allows tenants to continue paying rent for a specified period, with the option to purchase the property. Ultimately, payments will go toward the purchase price of the house. The second is a lease-purchase agreement, in contrast to a lease option, which obligates the renter to buy the home, rather than having the option to buy after a designated amount of time. 

 

Considering Rent-to-Own? Here's What You Need to Know!

House Hunting When Buying a House to Rent Later

Once you’ve decided that becoming a landlord is your best exit strategy, house hunting takes on a different slant. As an owner/landlord, you’re now buying a home with not only your needs and wants in mind, but also considering what your future tenants will prefer and happily pay the maximum rent. 

 

They’ll likely talk to you about these major considerations:

 

• House’s condition. A move-in-ready home that passes inspection with flying colors ‌means you’ll have less upkeep in the future, but you’ll pay a premium. You’ll have to decide if future fixes and potentially a property manager’s service are worth paying less for a fixer-upper home initially.  
• Sought-after school zones. Even if you don’t immediately need a top-ranked school, your future renters probably will want one.  
• Convenient neighborhoods. Convenience is personal and universal, so considering factors like commute times to base and public transportation is essential. 
• House amenities. You may prefer the one-bedroom, one-bathroom condo life, but will that lifestyle attract enough renters to choose from?

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Forecasting a Rental House’s Maintenance

Inexperienced landlords often overlook a rental house’s maintenance, but it's a significant line item for your rental business budget. Typically, you can expect home appliances to last around five years. Carpeting has a lifespan of three to five years. You may get lucky and won’t have to replace everything every five years, but you’ll definitely need to plan for the worst in case you do—the money adds up quickly. 

Major Home Systems

There’s a sense of reassurance if you buy a home with a recently installed roof or a new HVAC system, but you may not be in a financial position to buy an updated house. 

 

Investing in professional maintenance plans can help avoid major problems and provide some of the reassurance that new systems offer. Usually, a biannual plan is perfect, but some owners may prefer seasonal or quarterly inspections. Before buying the home, learn the roof’s age and detail the warranty on the materials and installation, so you can preplan a new roof or make repairs. 

Rental House Tax and Insurance Increases

Did you know that your property tax payment differs based on whether the home is a primary residence or a rental property? As a primary residence, the tax rate is lower. However, once the military owner no longer occupies the home, the tax rate for the property reverts to the higher rate for a rental property. 

 

It’s imperative to report the conversion from a primary residence to a rental home to the local tax authority; otherwise, you may face hefty fees and even criminal charges. Your real estate agent can give you ballpark numbers and discuss reporting to the proper authority. 

 

Your homeowners insurance does not cover renters. You’ll need to convert your insurance from a primary residence policy to a rental property policy, which will likely come with higher premiums. Keep this increase in mind while calculating rental property costs and discuss with your insurance agent the changes in your policy’s coverage. 

Exit Strategies for Military Renters

A two to three-year PCS cycle often makes buying a house financially difficult, so it's common for military members to rent houses over their careers. While it's easier to plan an exit strategy as a renter, there are some factors to consider before signing a lease, especially if you have an inkling that you’ll need to break the lease terms for a PCS. 

 

Keep in mind that the Servicemembers Civil Relief Act (SCRA) provides a legal lease break option for military families if you adhere to the stipulations. 

 

The SCRA allows early termination if:

• The member entered into military service during the lease.
• The member started a lease during military service and received orders to deploy for at least 90 days.
• The member received Permanent Change of Station orders.

AND

• The tenant provides written notice of intention to move.
• The tenant delivers the landlord a copy of official military orders.
• The tenant satisfies rent payments for both the month the notice is given and the following month.

You can read more about the SCRA protections in How to Break a Rental Lease for Military Transition. 

Reverse Military Clause 

If your landlord is a military member, there’s a chance they could receive orders to report to the duty station where they own their home. In this case, they may insert what’s known as a reverse military clause, which states that the current renter must vacate after receiving notice from the owner. The clause will spell out the advance notice guarantees and dates, so make sure you’re aware of how quickly you’ll need to pack up and leave if this type of clause is written into your lease. 

 

It might feel unnatural to create an exit strategy before buying or renting a home, especially for first-time buyers, but knowing how you’ll manage the unpredictable changes military life brings can help you feel confident about committing to such a huge investment. 

 

By Dawn M. Smith