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Military Real Estate Question
Old 11-07-2010, 11:29 AM   #1
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Military Real Estate Question

I have been debating with myself over the last few months with this issue and changing my mind back and forth. So I thought I would put it up here to see what everyone says. Quick info on me. 31YO, wife and 4YOson, O4 Army, 110K in retirement accounts, 30K in cash, 7K in college savings.

Situation: I own two homes, both are about to be rentals. When I bought them I was always intending them to be rentals when I moved. It has been part of my retirement planning to buy houses, rent them when I move, then when I retire sell and what ever the equity is, buy the new house out right.

House 1: Is a smaller house, in a small military town. It is worth about $135K and I owe 95K(put zero down payment). Great rental market, had it since NOV 04, and never been without a renter more than a couple days. It cash flows around $100/mo after property management fees. Still have a 5.65 30 year fixed rate.

House 2: Larger home in Raleigh, NC. It is worth aobut $300K and I owe 220K(put a large down payment). Planning to move next year, the house is in a great area, schools, community centers, and parks are being built all around it. I believe rent will make me break even after fees, I think the area is growing and think it will appreciate in value.

Question(all 3 I have thought about doing within the last few months):
1. Should I sell both?
2. Should I sell one?
3. Should I refi both and keep them, and stick to the plan.
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Old 11-07-2010, 02:09 PM   #2
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Well I am AD and have 3 rentals. I knew a dual military couple that bought a house everywhere they went and kept them to rent. I also have another friend AD who has 6 he rents near Maxwell AFB.

Being an absentee landlord can be hard. I think refinancing the rental may not be as good of a deal because they will hit you on the front end for non owner occupied. You would have to run the numbers. Now the 2nd house might be very interesting from a cashflow perspective. Look at the pen fed 5/5 ARM at 3.5% with the 2% every 5 yr cap. Check this scenario against the straight 30 worse case. If you can swing it I would say refi it while it is your primary residence, skip the month payment, and get ready to rent it. At the 0-4 level and maybe soon the 0-5 level you are going to be in a higher tax bracket. Assuming you don't need the equity for your next place I say role with it. Its not like you are going to be unemployed anytime soon.

Tomcat98
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Old 11-07-2010, 03:08 PM   #3
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I would sell them, but that's just because being a long-distance landlord is an uphill battle, especially for a military member. Maybe it works for you. My take on this:
Making money in RE is hard enough when you've got everything going for you. A good rental property and a good home for your family are not necessarily the same thing (even more the case now that your son will be starting school soon), so every house you buy, live in, and later rent out will be sub-optimal, a compromise. As you already know, PCS moves are hectic, and you won't always have time to do a thorough search for just the right house-the time between moves, your influence on where you get stationed and even the time you'll get to househunt will all likely decrease as you get more senior.
I'd sell the houses and do the RE thang after you retire and settle down if you still have the itch. As to when you sell them--I guess that depends on the local market, the renters you've got now, and how lucky you feel,

Best of luck!
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Old 11-07-2010, 10:30 PM   #4
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Originally Posted by RLTW View Post
I have been debating with myself over the last few months with this issue and changing my mind back and forth. So I thought I would put it up here to see what everyone says. Quick info on me. 31YO, wife and 4YOson, O4 Army, 110K in retirement accounts, 30K in cash, 7K in college savings.

Situation: I own two homes, both are about to be rentals. When I bought them I was always intending them to be rentals when I moved. It has been part of my retirement planning to buy houses, rent them when I move, then when I retire sell and what ever the equity is, buy the new house out right.

House 1: Is a smaller house, in a small military town. It is worth about $135K and I owe 95K(put zero down payment). Great rental market, had it since NOV 04, and never been without a renter more than a couple days. It cash flows around $100/mo after property management fees. Still have a 5.65 30 year fixed rate.

House 2: Larger home in Raleigh, NC. It is worth aobut $300K and I owe 220K(put a large down payment). Planning to move next year, the house is in a great area, schools, community centers, and parks are being built all around it. I believe rent will make me break even after fees, I think the area is growing and think it will appreciate in value.

Question(all 3 I have thought about doing within the last few months):
1. Should I sell both?
2. Should I sell one?
3. Should I refi both and keep them, and stick to the plan.
There's no right or wrong answer here, just a question of whether you're hard-wired for the landlord lifestyle and willing/able to absorb the downside risks.

Pros include a potential stream of revenue, a possibility of appreciation, and locking up large sums of "dead equity" in illiquid assets to prevent stupidly frittering it away on rash investments like stocks & bonds. Maybe you'd even come back to Raleigh someday. I know someone retiring to there from Norfolk in the next six months.

Cons include difficulty obtaining financing when buying your next/third residence (Mortgage broker: "You have HOW MANY rentals? Uh-oh."), marginal cash-on-cash returns that someday may be less than CD rates for much more hassle, and the exposure to typical landlord risks. You're probably OK with tenants, especially on the first home, but you're still facing future rehab costs without the likelihood of higher rents.

Right now you might even be able to beat your current cash-on-cash returns by selling the properties, paying the sales costs, and putting the same after-tax money in PenFed CDs. Thefed does pretty well with his Cleveland rentals but our Hawaii rental is "only" doing about 4%. That's pretty hot stuff today but three years ago it was miserable.

After 20 years of landlording we've learned that the longer you do it, the more opportunities there will be for something bad to happen. It helps to be in the area with plenty of cash to make things right again. If you're landlording through a management company from six time zones away then you're at the mercy of the tenants, the manager, and the contractors. It takes a lot of faith and trust.

We refi'd our rental last year at a 4.625% 30-year fixed "investor rate" through Bank of America. I think you're going to have a hard time finding anything better than your current rate that won't cost you months or even years of payback, but the Fed's next round of quantitative easing may prove me wrong.

I don't know about you other veteran landlords, but when I look back on our 1980s real-estate ventures, buying & selling every 2-3 years in different time zones, I'm astounded that we got away with it. Today I know plenty officers who have been renting out their "ensign's first home" for over 20 years, getting little or no cash-on-cash return for their efforts. I can only imagine what's happening to the current crop of new officers who bought homes at every duty station, not expecting to be underwater on their mortgages for years or even decades.

RLTW, if I were in your shoes today then I'd be looking for the exit and selling the properties at the next good opportunity, whether it's at your transfer or five years from now when the housing markets stage a comeback. You could spend the time until then deciding whether you want to put the money toward ER, college funds, or a revised asset allocation.

Perhaps my cynical pessimistic attitude is influenced by having spent one morning in each of the last three weeks at our rental doing yardwork and installing an extra outdoor light. A tenant worrying about a dark sidewalk is an invitation to landlord liability disasters. If I wasn't capable of doing the carpentry & wiring myself then it would easily have cost a few hundred bucks from an attic-crawling electrician.
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Old 11-08-2010, 09:55 AM   #5
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Personal preference, so the decision is entirely yours. But based on my experience with previous long distance rentals, and my current ones, I'd suggest you sell them. If you want to be a landlord, sell house #2 and used proceeds to pay off house #1. (provided that house is not in need of any major systems replacement or roof) That way you are not leveraged at all. Don't kid yourself about the tax benefits of the mortgage on it...
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Old 11-08-2010, 11:07 AM   #6
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I know it is pretty difficult, because there is risk either way. I hear all the time, don't be a long distance landlord but I like the fact in house #1: it is cash flowing and as steady renters, good property manager. Then in house #2, I would sell it however, I believe the market is improving there, and I think in 5-10 year I could have made some money. Also I might go back there someday.

Nords, Is your friend looking for a nice rental HAHA just kidding....well maybe not

Anyways, I will continue to dabate it. I have a little bit of time to decide, I might just have to do a full MDMP COA analysis, and just let the numbers and my training figure it out. I guess that is a a whole other debate.
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Old 11-08-2010, 03:07 PM   #7
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Hi RLTW,

Congrats having this sort of decision :-)

Agreed it is all about the numbers and their interaction with you. Here is my 2c thinking which brought me to a plan to sell two of 4 current houses, mebe buy a multi-family, or other real estate if I can get it cheap enough - otherwise will allocate dollar cost average into stocks.

I started buying real estate because I had a lot more confidence in my ability to estimate value in real estate than in stocks (some of the confidence was misplaced as some of the appreciation was due to luck more than impeccable judgement). This allowed me to be comfortable with lots of leverage for RE.

Now I have 10 years of annual returns (much longer history for sold RE w less careful tracking) for all components of networth -mainly due to the leverage, real estate definitely raised the total "portfolio" return (as did some managed funds) over the last 10 years. BTW Saving was by far the biggest contributor.

I think I am bit smarter about indexing and low cost investing now. I now think of my allocation of % net worth $ to real estate as one area for asset allocation... so the questions I think about when buying/selling include:

(1) Expected return (property tax, big maintenance, leverage, tax efficiency)
(2) Geographic diversity
(3) Asset allocation tilt, diversity and risk
(4) Alternative investment uses and expected returns of the $$$
(5) My crystal ball reading capability

Ie if I am not likely to want the $$$ or borrowing capacity in the house - it comes down to whether I think I can do better in that property... or another one or a totally different asset area... then I will measure... and probably be too old to implement what I learned and the kids probably won't heed my advice :-(

Good Luck... I think real estate is local... and personal
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Old 11-08-2010, 03:25 PM   #8
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Nords, Is your friend looking for a nice rental HAHA just kidding....well maybe not
Typical military family. They're trying to simultaneously have him retire from the Navy and immediately join a Raleigh surgery practice (during his terminal leave) while their youngest graduates from a Norfolk high school next June, and before then she's planning to sell their Norfolk home (it's on the market now) so that she can blithely drive down to Raleigh to buy her dream house and live happily ever after.

We've been hinting that she might want to slow down the pace a little... see how he likes the job, maybe even rent until she gets to know the area and can really find her dream house.

She's getting together with spouse this weekend. They'll chat.
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