Here is the question of the day, and my response. I’m a US Air Force veteran and a Realtor in Florida. While I can’t speak to Texas specifically, I will gladly answer in the broadly general concepts. I love working with Veterans and Active Duty Military, because that camaraderie never really goes away. So, I’m happy to share this information, because one of my biggest regrets is that this information wasn’t available to me when I started. I can’t turn the clock back, but I can help you and others.
Firstly, yes, I completely recommend buying a house while on Active Duty. You’re at a duty station, so you should have no problem qualifying for a VA Home Loan.
As you read further you’ll find this is a powerful tool, but for now, understand that the VA Home Loan can finance a home purchase with 0% down, up to $424,100 in most markets.
I certainly wouldn’t recommend starting at that price point, but it’s good to know.
Let’s step through it and keep it simple.
Your first step is to get a Certificate of Eligibility (COE, because we love acronyms, right?). Here are the qualifications for Active Duty:
Once you have that information available, you simply go here and apply online.
And if you want to know more, it’s available here.
The next step is to find a Realtor, preferably either Active Duty or Veteran. There are certification programs for Realtors who have never served to work with Veterans and that’s cool too. But really, you’ll probably be far more comfortable with someone who natively speaks the common language (PCS, TDY, etc.).
Ask your Realtor who they would recommend for a Mortgage Broker. You’ll need a loan, and mortgage brokers can shop almost all lenders for the best rates for you. This can save you hundreds of dollars a month. They can get your COE for you, but it’s easier and faster for you to do it yourself.
You can shop lenders on your own, but I don’t recommend it. I know lending pretty well and I wouldn’t try it. The only one you should shop directly is USAA, because they only deal directly. Still, use that mortgage broker, see if they can get a better deal for you.
The rest your Realtor will walk you through, all the way up until closing when you get your keys to your new home.
Now for the pro vs con discussion.
You can build equity.
This should be taught in school, but noooo, knowing the Pythagorean Theorem is apparently way more important.
Concept #1 – Whether you rent or buy, you’re paying a mortgage. If you rent, it’s your landlord’s mortgage payment plus some profit for them. If you buy, it’s your own mortgage payment.
Remember this – I refer to it again later.
Equity is simply the difference between what you pay, and what it’s worth. Typically, housing “Appreciates” or grows in value over time. You keep paying down the balance, and the house continues to increase in value.
So, let’s use this example. You buy a home now for $150,000. In three years, it’s worth $200,000. Congrats, you have $50,000 in equity.
You should definitely pursue this concept. Buy a starter home that is a little ugly but still functional and meets the VA Loan qualifications. Then paint it, upgrade the flooring, update the kitchen, etc. Make it a much better and more attractive property. This is called “Forcing Equity”, and a popular concept on HGTV.
The kicker? Your BAH will probably cover most of your home ownership expenses. You won’t be paying much out of pocket. Your dear old Uncle Sam will pay for most of it!
You can cash out when you move – and we all know the military likes for you to move
So your tracking just fine on your game plan. And you get PCS orders. You have two choices, the first of which is to sell your home.
But what about all of that equity?
Well, using that same example, you’re going to sell it for $200,000. There are closing costs and Realtor fees and other minor bits involved, so let’s say that when you’re all done, you make $30,000.
That’s cash in your pocket.
Now, here’s the truly sweet part of this – as long as you have lived in your home for at least 2 years out of the previous 5, the IRS says not to claim that on your taxes as income. This is a blanket exemption in the tax code, anyone can use it repeatedly as long as they meet those basic criteria.
That’s right – it’s completely and totally tax free! And that is up to $250,000 for a single person, or $500,000 for a married couple.
Don’t take my word for it – just Google IRS Code Section 121 and read it for yourself. Yeah, it’s boring, but it’s worth knowing. Besides, how often does the IRS say “Make money and we don’t want to know about it.”!?!?!
If you did this over 3 years, that’s $10,000 a year, tax free, simply for living someplace and knowing what to do. That’s better money than a part-time job. And who doesn’t want to make more money?!?
But wait, there’s more!
You didn’t hit the full 2 years before getting PCS orders? Guess what – the IRS has an additional exemption for Active Duty Military. You can (probably) still get the full exemption.
You’ll need an accountant to keep you in the clear on this one, but knowing the concept is more important the step-by-step execution.
Or you can keep the house and rent it out for cash flow.
So you have a nicely renovated home, but you need to move. Sure, you can sell it and cash out the equity.
Or you can keep it, and rent it out.
Remember when I said “Concept #1 – Whether you rent or buy, you’re paying a mortgage. If you rent, it’s your landlord’s mortgage payment plus some profit for them.”
Guess what? You can use that to your advantage by becoming the landlord.
Contact your Realtor again and find a reputable and affordable property management company. They will handle, well, pretty much everything for you.
Your tenants will pay your mortgage, the property management fee, and there will probably be a little left over for you every month. Even $100 is a nice bonus in your pocket for not doing much.
This income will be subject to taxes, but it is at a much lower rate. Bank it, let your accountant figure it out.
There’s a lot more to this method, but it’s certainly worth learning about.
Rinse and repeat – One area where Active Duty Military status will serve you well
There is absolutely nothing stopping you from doing this repeatedly.
It’s completely legal, as long as you operate legally (which is really easy to do).
This can build a tremendous portfolio for you. I know of one E9 that did this his entire career. He has over 100 rental properties. At even $100 per property, that’s $10,000 a month in income, and he’s sitting on several million dollars worth of real estate, all paid for by tenants.
You can get stuck with a lemon
Pay attention when you’re buying. Pay the $500 for a detailed home inspection, and study it closely before moving forward.
“Ugly” can be fixed.
“Broken” can drag you down insanely fast. Bad plumbing, bad roof, bad ground, all can break you.
Typically, the VA inspector will catch these before it’s a problem, but no one is perfect 100% of the time.
You can get upside down
Mortgage rates are incredibly low right now, and prices continue to rise. However, real estate always cycles and corrects.
You could pay $150,000 today, and a year from now the market could crash and it might only be worth $75,000.
Ouch – there went your equity!
You can still sell if you want, but you won’t cash anything out, and you may end up owning a bit.
If this happens, you’re better off holding and renting it out, until the market comes back up.
Oh, and if you like that rental model, when the market crashes is the best time to buy. All of the properties are bargain priced!
Uncle Sam can screw you – but you’re in the Military so you should know this!
Ahh, the Green Weenie.
Personal experience. I started off small, in an On-Base Mobile Home Park. It wasn’t glamorous. Hell, it was barely livable. But that wasn’t the goal.
We bought for $10,000. The previous owners bought for $10,000. And so did the ones before them.
It was a great way to build equity quickly, using that BAH. And after it was paid off, that BAH keeps coming. No lot rent, no further expenses. And when you sell, you get your money back.
And I had a buddy in my shop that went full on into this. He bought a $62,000 manufactured home, and it was beautiful, damn near magnificent.
Quite literally the day after his home was completely finished, the base commander called a meeting of all of the residents of the Mobile Home Park.
He had decided to close the Mobile Home Park. (That bit of Blue Faclonry got him bumped from Full Bird to 1-Star.)
Anyone living there would need to relocate their home off-base when they PCS’d or separated.
Period. No warning. No heads up. No discussion.
Just $10,000 plus moving expenses swirling away down the drain, along with everyone else.
We donated ours to Goodwill, took the loss on the taxes.
And despite all of the pressure, I refused to re-up. Got my DD-214 two months later, and never looked back.
I regret that I didn’t have this post ready to go immediately, but hopefully you (and others) will find value in it.
And if nothing else, I can use it again in the future.
If I can help you (or anyone else) with any of these questions, please don’t hesitate to contact me.
I’m not licensed in any state other than Florida. If you’re near the Tampa Bay area, I’m happy to help you. If you’re elsewhere, I can reach out through my contacts and find a good resource for you.
If you want to learn more about these concepts, I have a ton of articles on my website.
Good luck, and good fortune in your real estate pursuits!