How does a house fit into this plan?

[timwalsh300]

Thanks again for all the great replies to my last question about the need to take risk with our investments.

My fiancee and I have talked this over and decided to (1) continue maxing out our Roth IRA's with $10k/year, (2) begin maxing out a Thrift Savings Plan with another $16.5k/year, and (3) use a balanced stock/bond mix for these investments. FireCalc says that following this plan for the next 20 years, coupled with receiving a military pension, would give us a very high probability of being able to retire successfully in our early 40's.

Anyway, my next question is about housing. I'm familiar with the conventional wisdom about buying vs. renting: that you should only buy if you plan to be somewhere for at least 3-5 years. Unfortunately, as an active duty military member I think 3 years is about the longest I could ever expect to be in one place and I'm afraid that we'd be at a disadvantage if we just rented for the next 20 years and then left the military with 0 home equity. Am I correct in this line of thought or not?

Some older military members I've spoken to have dealt with this by purchasing homes wherever they get stationed and turning them into rental properties when they PCS. This has worked out great for some, but I've heard from others that it can cause serious headaches. Any thoughts on this?

Another idea I've been cultivating is this: rent and aggressively save money for a few years until we can buy a modest home with cash. This would give us 100% equity from the start and (I think?) avoid most closing costs. When we PCS we'd sell and get our money back (ignoring capital gain/loss) minus the cost of insurance, property tax, and maintenance (which seems cheaper than renting). We could then use that money plus other savings accrued along the way to purchase another, less modest home at the next duty station and so on. Upon retirement we'd have a paid-for home. Is this as smart as I'm imagining, or am I missing something?

Tim

 

[REWahoo]

Some older military members I've spoken to have dealt with this by purchasing homes wherever they get stationed and turning them into rental properties when they PCS. This has worked out great for some, but I've heard from others that it can cause serious headaches. Any thoughts on this?

Here are several threads on the subject from our FAQ section. They should shed some light on the subject: http://www.early-retirement.org/forums/f47/faq-archive-landlording-real-estate-investment-43700.html

 

[W2R]

I understand the dilemma, having been a Navy wife for many years.

Something to think about is that in many areas (other than coastal areas during the housing bubble), housing is better thought of as a place to live, than as an investment. As an investment, it is OK but not stellar in these areas.

If you can invest that money until you are ready to retire and stay in one place, you'd probably earn as much or more on your money in stocks and bonds. By the time you retire you would be ready to buy a nice home in cash. The advantage of doing this would be that you would avoid the headaches of buying and selling while you are in the military and moving so often.

However, if you did this you wouldn't have the personal satisfaction of owning your own home between now and then. But it is an idea to consider.

Edited to add: Oh, and REWahoo's links are great! check them out.

 

[RunningBum]

Not only the headaches, but also the 6-7% realtor commission. That's a hefty fee on a 3 year investment, along with your other closing costs.

 

[timwalsh300]

Something to think about is that in many areas (other than coastal areas during the housing bubble), housing is better thought of as a place to live, than as an investment. As an investment, it is OK but not stellar in these areas.

If you can invest that money until you are ready to retire and stay in one place, you'd probably earn as much or more on your money in stocks and bonds. By the time you retire you would be ready to buy a nice home in cash.

I'm not sure what you are suggesting here...

The purpose of buying the home would not be to invest in real estate, hoping to flip houses and make a profit. The idea is just to save money over the long term on housing by building equity for ourselves instead of someone else (renting).

My thought was that in the early years we'd pay $X/month in rent, and save $Y/month toward buying a house (during such time money would be tight). Eventually we'd have enough $YYY savings to buy a house, and we'd no longer have to pay $X/month in rent (only some smaller amount equal to insurance, taxes, and maintenance).

Are you saying that we could come out on top by continuing to pay $X/month in rent for 20 years, and just waiting until retirement to spend our $YYY (invested over that time) on a house (or other things)?

Tim

 

[timwalsh300]

Not only the headaches, but also the 6-7% realtor commission. That's a hefty fee on a 3 year investment, along with your other closing costs.

I guess this is an important question: How much would we be paying in closing costs if we buy with cash? My understanding was that closing costs were related to taking out a mortgage...

And can't Realtor fees be avoided by doing FSBO?

Tim

 

[W2R]

Hi Tim,

I am just saying that one option is to continue renting, and to save and invest as much money as you can in a nestegg to buy a house when you are sure you will not have to move so often (such as when you retire). Consider the expenses of property tax, insurance, home maintenance and repair, and the costs of selling and buying (such as realtor's percentages but also closing costs and down payment). These are all sources of money to funnel into the nestegg to buy a house later on. This money can be compounding over the years between now and the time when you buy the house.

Houses are tough to sell right now, and renting out a house you can't sell, while living out of town, is a headache when you have other responsibilities. Who knows what the situation may be in the future.

There are closing costs when you buy in cash. Selling a house by FSBO in a market such as we have today, when in many locations it is hard to even sell with a realtor, is another headache you don't need.

If you could guarantee that you would be stationed only in housing markets that would be conducive to quick, easy sales by FSBO and making (rather than losing) money on each successive house sale, your plan could work. But you don't know that.

 

[RunningBum]

I guess this is an important question: How much would we be paying in closing costs if we buy with cash? My understanding was that closing costs were related to taking out a mortgage...

And can't Realtor fees be avoided by doing FSBO?

Tim

You'll save the 1% origination fee, and of course any points you might've paid to lower the rate. There's probably a few more paperwork items too, and no credit report, but you still want things like title insurance, termite inspection, probably a lawyer to handle the closing, and so on.

You can do FSBO, but if the buyer has a realtor you're still going to pay 3%. And what if you have to move and your house isn't sold? How are you going to show it if you're somewhere else? And the whole timing issue is probably tricky too, unless you can swing owning 2 houses during the overlap.

Not saying the numbers won't come out better buying instead of renting. I had a 5 year plan and ran a spreadsheet that said buy, and it did work out right. But it was one time, and I knew I'd have flexibility at the end if it didn't sell right away. I don't know if the answer would have been the same for 3 years.

 

[check6]

I guess this is an important question: How much would we be paying in closing costs if we buy with cash? My understanding was that closing costs were related to taking out a mortgage...

And can't Realtor fees be avoided by doing FSBO?

Tim

Tim, I just closed on a condo a couple of days ago, paid cash and the closing costs were $3,000 which included among other things, my prorated share of the taxes, HOA fees, and the seller's fees (part of the contract I agreed to). They do add up.

I was going to sell my other condo FSBO but like another poster said, in this market I would not get the visability needed so I listed it with a realtor.

Ck 6

 

[LARS]

I would imagine right now you are better to rent. I say this because in general renting is more cost effective (ie cheaper than ownership). Someday (my crystal ball says at least a couple of years away at a minimum) the balance may shift to ownership. If it does then you can revisit the buy vs. rent question.

 

[brewer12345]

Tim, were I in your shoes, I would just rent. There is a cash cost to owning a house that may well be in excess of rent. The popular myth that rent is "throwing your money away" is patently false: you are paying a fixed amount every month for a roof oer your head. In contrast, owning entails certain known monthly expenses (mortgage interest, RE taxes, utilities, etc.), but it also requires significant unknown expenses (repairs, improvements, major upgrades, appliances, etc.) and if you want to sell you take market risk on a highly levered asset and pay hefty transaction fees on both the buy and the sell. If you rent and save your money, I imagine that you will do at least as well as someone who buys and moves every 2 or 3 years.

For a real life example, you can consider my circumstances:

In 10/02 I bought a modest 2k sq ft 3 bed/2 bath house for 300k. This is in a market that has not completely cratered. I put down 20%. IIRC, transaction costs when I bought were about 2% of the purchase price.

7 years later the house just appraised for 360k (refinancing this weekend). In the meantime, mortgage interest has been (average) about $900/month, RE taxes have been (average) $550/month. So right off the bat just living here would have cost me $1450/month. We have also put roughly $50k into the house via maintenance and major upgrades. Add in another $200/month for other costs (extra utilities, yard stuff, etc.). So the house is worth about what I put down plus what I put into it before I have even paid transaction costs, and it cost me $1650 for the privilege of living here. In contrast, I could have rented an equivalent place for no more than $1500/month and not had to deal with maintenance, upgrades, tying up over $100k of capital, etc. Not a great investment overall and really easy to beat if you are putting the excess away into a diversified portfolio. And if you incur 5 to 10% roundtrip transaction costs every 3 years by selling and buying somewhere else, the economics get dramatically worse.

 

[tryan]

Just rent and invest what you can. Owning a home is an anchor you do not need. Being an out of state landlord is no picnic.

And home equity is not a given. Keep in mind, most who purchased from 2002-2007 have no equity ... they're renting from the bank. And many are upside down (managing the property for the bank or worst: subsidizing housing for a tenant via a negative cashflow).

 

[timwalsh300]

And home equity is not a given. Keep in mind, most who purchased from 2002-2007 have no equity ... they're renting from the bank. And many are upside down

if you want to sell you take market risk on a highly levered asset and pay hefty transaction fees on both the buy and the sell

It seems that you guys missed the part where I said we'd only buy if we could do so with cash - no bank, mortgage, or leverage involved. (...Unless the plan was to rent out the house later on, but that isn't particularly attractive to me.) The whole point of this would be to have 100% equity from the start and avoid closing costs. The question is, how would that change the equation?

Tim

 

[Lsbcal]

It seems that you guys missed the part where I said we'd only buy if we could do so with cash - no bank, mortgage, or leverage involved. (...Unless the plan was to rent out the house later on, but that isn't particularly attractive to me.) The whole point of this would be to have 100% equity from the start and avoid closing costs. The question is, how would that change the equation?

Tim

To answer this you should sit down with a spreadsheet and compare the two scenarios. You are proposing to buy real estate with no leverage and hoping that appreciation will be decent over the investment period? I don't think asking this question in this forum is going to get to the level of analysis you'd require to make an intelligent decision although there have been a lot of good comments here.

I'd suggest you do the cash flow analysis for buy versus rent. In your case there is the added complication that you'd not be able to live in the residence during the full analysis period. So maybe you'd have to add in a management fee and possibly some extra repair costs associated with potential mismanagement. There are probably decent sources at your library on doing a proper analysis. Then you might come back here and present your cash flow analysis for critique.

 

[timwalsh300]

You are proposing to buy real estate with no leverage and hoping that appreciation will be decent over the investment period?

No - I'm not factoring in any appreciation/depreciation of the home's value whatsoever.

I'm just hoping that after purchasing the home, I will not have to pay as much per year for housing. It seems to me that paying rent is the equivalent of paying someone else's mortgage, taxes, insurance, and maintenance costs. After purchasing the home I figure that my costs would only be taxes, insurance, and maintenance. Each time we move we could cash out the value of the home, and purchase another one at the next place with this money.

I'm working on a spreadsheet for this to try to figure it out for myself. I'll share it here when I think it's done.

I realize this is unconventional, and I'm just trying to make sure that I'm not failing to consider something important.

Tim

 

[jdw_fire]

No - I'm not factoring in any appreciation/depreciation of the home's value whatsoever.

I'm just hoping that after purchasing the home, I will not have to pay as much per year for housing. It seems to me that paying rent is the equivalent of paying someone else's mortgage, taxes, insurance, and maintenance costs. After purchasing the home I figure that my costs would only be taxes, insurance, and maintenance. Each time we move we could cash out the value of the home, and purchase another one at the next place with this money.

I'm working on a spreadsheet for this to try to figure it out for myself. I'll share it here when I think it's done.

I realize this is unconventional, and I'm just trying to make sure that I'm not failing to consider something important.

Tim

are you factoring in the loss of investment return you would get if you left the money you will use to buy the house in the investments it is in now?

 

[samclem]

I'm familiar with the conventional wisdom about buying vs. renting: that you should only buy if you plan to be somewhere for at least 3-5 years. Unfortunately, as an active duty military member I think 3 years is about the longest I could ever expect to be in one place and I'm afraid that we'd be at a disadvantage if we just rented for the next 20 years and then left the military with 0 home equity. Am I correct in this line of thought or not?

No, I don't think you are correct. You will have closing costs, and not having a mortgage will only reduce those costs slightly. I've done both--owned homes and rented them. If you'll be moving every 3-5 years (as most military folks do, especially officers) it generally does not make financial sense to buy your homes.
Factors:
- You will sometimes get orders with little notice (no matter WHAT you've been told). This puts you at a tremendous disadvantage when trying to get market price for your house.
- When you sell you have very little control over the date of closing, especially if the market is weak. When that much-waited-for buyer shows up, you'll have to take that offer. The only thing worse than moving your family once is moving them twice--once to the the TLF or a short-term rental, then to the new PCS location.
- Generally, to make money (or just break even) in real estate if you'll be in the house only a few years, you need to buy smart. You need to look carefully for a great bargain when you buy. This is hard enough when you live in a town, know the neighborhoods, and have connections. It is impossible when you have 3-7 days to househunt in an unfamiliar town.
- You'll have no ability to flex your buy/sell decisions with the housing market. When Uncle Sam says move, you go.
As a military member, all the cards are stacked against you in this game. I've bought, and we've never lost much money, but that has just been luck

Some older military members I've spoken to have dealt with this by purchasing homes wherever they get stationed and turning them into rental properties when they PCS. This has worked out great for some, but I've heard from others that it can cause serious headaches. Any thoughts on this?

Sometimes it works out, but generally it doesn't. A lot of those old-timers you talked to, if they did an analysis of how they would have done if they'd invested the money in different ways, and if they added up all the maintenance costs over the years, would see that they didn't do that well.
- You look for different things in a personal home than what you want in a rental property. Thus, you shouldn't expect that the house you bought to live in will give the best return on investment.
- Absentee landlording is tough. Some folks who do their own managing of properties have problems making money consistently, so how likely is it that you'll make money, or just break even, after paying someone else 6-10% to do it for you? They sure won't be watching expenses like you would. If a tenant says a faucet is dripping, they'll call a plumber, send the bill to timwalsh300 (cha-ching!).

Put another way, would you, today, be tempted to buy a single family home in a town across the country in hopes of making money by having someone else manage it? Probably not (or you'd be doing it already). If that's not a good move now, there's no reason it will be any different after you've lived in the house, it's the same thing. Leave te landlording to the locals.

Another idea I've been cultivating is this: rent and aggressively save money for a few years until we can buy a modest home with cash. This would give us 100% equity from the start and (I think?) avoid most closing costs. When we PCS we'd sell and get our money back (ignoring capital gain/loss) minus the cost of insurance, property tax, and maintenance (which seems cheaper than renting). We could then use that money plus other savings accrued along the way to purchase another, less modest home at the next duty station and so on. Upon retirement we'd have a paid-for home. Is this as smart as I'm imagining, or am I missing something?

Cutting out the mortgage costs will not significantly reduce your closing costs (and other costs of buying/selling a home). Don't forget the opportunity cost in all this--your money tied up in a home is not in stocks or bonds earning dividends and appreciating.

We bought our homes early in my career. As we wised up and I did the math using real numbers, we quit buying and started renting instead.

On a non-financial note: It is a HUGE relief to be renting when you get PCS orders. When you move there will be a lot going on. Keeping the house in presentable condition for prospective buyers is a giant PITA. Stress over selling the house adds to all the other stressors of a PCS move. How much nicer it is to have a date-certain that you'll be out of the house and to just drop the keys off with the landlord on that date. As Mr Gump said . . . "so, that's one less thing."

What you're proposing isn't unconventional, lots of us have considered it and even done it.

Later we can talk about FSBOing. Bottom line: You might save some money, but it won't be a lot. Anyone assuming that they'll just pocket that 6% broker's commission is not being honest with themselves.

 

[WM]

Count me in with the "rent for now" crowd. Owning a house is expensive if you keep up with the maintenance, even if you buy a house that's in good shape to start with. I don't see why buying with cash versus financing it makes much difference.

DH is USMC (14 years) and we're hoping to early retire when he hits 20. We bought our first house in 2001, at DH's 6-year mark. We already knew the area, since we'd been stationed here previously, and we thought it would be a good investment (coastal San Diego), and we thought we might want to stay here long-term. As it turned out, that's worked well for us. We ended up staying 5 years the first time, and now we're back here again and really glad we didn't sell.

We bought our second house in 2006 when we moved to CO. We knew it would be 3 years, and on paper I calculated that it would be about the same to buy as to rent, even accounting for taxes, repairs, etc. And we'd done so well the first time, and we didn't want to be in someone else's house, and we could always rent it out.... We were careful by buying a cheap house in a good neighborhood that was already in good condition. Well, you can guess where this is going. We put way more money into the house than I expected for minor remodeling and repairs, the market obviously tanked, and although our rental here went ok we had no desire to continue being long-distance landlords (and rent wouldn't have covered the mortgage anyway) so we sold it when we moved this summer. All in all I figure that house purchase cost us about $30K over what it would have cost us to rent. Or we could have rented a much nicer place!

And now we're back at our first house, which is a big relief but we're spending thousands of dollars this first year again on deferred maintenance items that just didn't quite get taken care of the 3 years we were renting it out. Nothing serious but there's always something.

Overall I feel we were lucky with our first purchase and it wouldn't have worked well except that this ended up being a place we want to stay. No question, the equity will be a nice cushion for ER, but we'd be ok even without it. And you and your fiancee are well ahead of where we were starting out. IMO, buying one or more homes as you move around isn't necessarily going to help your financial progress, and it could just as easily go the other way.

 

[WM]

A lot of those old-timers you talked to, if they did an analysis of how they would have done if they'd invested the money in different ways, and if they added up all the maintenance costs over the years, would see that they didn't do that well.


On a non-financal note: It is a HUGE relief to be renting when you get PCS orders. When you move there will be a lot going on. Keeping the house in presentable condition for prospective buyers is a giant PITA. Stress over selling the house adds to all the other stressors of a PCS move. How much nicer it is to have a date-certain that you'll be out of the house and to just drop the keys off with the landlord on that date. As Mr Gump said . . . "so, that's one less thing."

Samclem bring up many good points. Definitely question people closely about how they're calculating that they did well renting out a home, or buying and selling. I knew other families in CO who were saying they'd be happy if they "broke even" on the sale of their house, by which they meant selling it for what they paid. This makes no sense to me - ignores realtor fees (at least 10K in this case) along with the improvements the made to the homes. Happiness-wise, that's fine, but financially it's not "even."

Also, I can't describe to you how stressful it was trying to get our second house ready for sale in a horrible market (knowing we'd lose just as much money renting it out for several years as selling it for 10K less that what we paid, which was the eventual price). Months of getting it ready, talking to realtors, and just worrying. It paid off hugely - we sold in a matter of weeks when other properties were sitting for months - but I never want to do that ever again. And because we were trying to move back into our house here, which was occupied, we nearly had to move 3 times - once into temporary housing in CO (which we avoided, pure luck), once into temporary housing here (which we did have to do, since our tenant didn't want to move early) and once into our own house. And we couldn't have used the temporary base housing because it's time-limited and/or doesn't allow pets. And temporary housing off-base is very expensive.

I agree, renting can feel frustrating and like you're wasting your money. That's one of the reasons we bought our first house. But owning a house comes with a lot of its own issues and headaches that can really be compounded by mandatory moves.

 

[brewer12345]

It seems that you guys missed the part where I said we'd only buy if we could do so with cash - no bank, mortgage, or leverage involved. (...Unless the plan was to rent out the house later on, but that isn't particularly attractive to me.) The whole point of this would be to have 100% equity from the start and avoid closing costs. The question is, how would that change the equation?

Tim

Buying with no leverage makes it somewhat less risky, but does not change the costs much. You still have the hefty transaction costs on both ends and all the other costs except the mortgage interest. And if you do not have a mortgage then you have an interest cost in the form of lost earnings on the capital you tie up in the house.

Owning a house is generally not a great financial deal and it comes with a special set of significant headaches, especialy if you move frequently. So if you are looking at this as purely a financial issue, it is pretty much impossible to justify buying.

 

[Lsbcal]

Another investment risk that you are offloading when you rent is natural disaster risk -- floods, earthquakes, tornadoes, falling trees in wind, etc. Some of these you can get reasonable cost insurance for but you are still at risk even then for the deductable.

 

[Meadbh]

We can debate the financial pros and cons of buying versus renting until the cows come home but it's important to separate two issues here: the satisfaction of owning one's own home, and the financial risks and benefits of investing in real estate.

A lot of the satisfaction involved in owning a home have to do with the "nesting" instinct, crafting a cosy and customized home for you and your family, and building links and routines with the community of your choice. Unfortunately, your chosen career makes this quite a challenge. If you do buy a home, have you considered the emotional wrench of having to give up your "nest" at a time and for a place not of your choosing? If you rent, you won't have the satisfaction of ownership, but you will avoid some of the emotional grieving too.

Investment in real estate is a logical part of any diversified portfolio. Given your mobility, perhaps the best approach might be to calculate the difference between rental and buying costs, and to DCA that amount in REITs. When you retire, that could be your "house fund". ER will be your best opportunity to buy a home where you choose, for the long term.