To Buy Or Rent

To buy or to rent?

| March 20, 2017

That is the question for military families seeking their next home

It’s often said – mostly by companies that lease cars – that you should always buy appreciating assets and lease depreciating assets. Since cars are the very definition of depreciating assets and houses are the most valuable appreciating asset most people will own in their lifetimes, the obvious conclusion would seem to be that we should always lease our cars and always buy our homes.

But it’s not quite that simple. Because if you’re the kind of person who is content to drive the same car for years after it’s paid for, even those in the business of leasing cars will begrudgingly admit that buying might make more sense for you. And if you happen to be in a profession that requires you to make frequent moves, even those who sell houses for a living will concede that buying a house could be riskier than renting one.

That last point is particularly relevant for mobile military families. Those who have benefited from selling into the soaring real estate market of the last few years may be convinced that buying a home and selling it two or three years later is a great way to turn a quick profit. But the truth of the matter is that, under normal market conditions, you’re just as likely to lose money on a short-term real estate purchase and sale as you are to make money. In fact, losing money might be more likely – because you will typically lose money when you sell a house even if you break even.

Here’s an example of how that can happen: You fall in love and buy a great little Craftsman bungalow in Colorado Springs for $200,000. Three years later, you receive new orders and put it on the market for $220,000. But home sales have slowed down and three months later, you’re in Pensacola, but your bungalow is still on the market in Colorado Springs. After another month, you give in to your realtor’s advice and lower the price to $210,000. Two months later, you finally get an offer – for $195,000. You counter at $200,000 and the buyer accepts. A month later, you finally close the deal.

Technically, you’ve broken even. But have you really? Keep in mind that you had to continue to make payments and pay taxes and insurance for four months after you moved. Let’s conservatively estimate that at $1000 per month, for a total of $4000. Then, you had to pay your realtor a 6 percent commission for selling the house. That’s another $12,000. It’s also possible that the buyers could have asked you to pay a portion of the closing costs, and you could have chosen to spend some money on minor repairs and cosmetic updating in preparation for selling the house. But even if you got off the hook on closing costs and didn’t spend any extra money, the numbers still add up to a $16,000 loss.

So does that mean that military families who choose not to live on base should always rent? For those who are uncomfortable with uncertainty, that’s exactly what it means. But for those who are willing to accept some risk, there are a couple of scenarios in which buying may be a valid consideration. The first is when the combination of low interest rates and a robust supply of homes for sale makes monthly mortgage expenses significantly lower than monthly rental rates. If it’s going to cost you $500 per month less to make mortgage payments on a home than to rent a comparable home, for example, the $18,000 you stand to save over a three-year period could very well offset your closing costs and any commission or other expenses you may have to pay to sell it. And if the house you buy also appreciates over that three-year period, you might walk away with a profit.

How will you know about things like the cost of renting versus the cost of buying and whether home prices in a particular neighborhood have peaked or are on the rise? Unfortunately, there’s no shortcut. You’re either going to have to do your homework online or consult with an experienced local real estate agent – and it’s probably best to do both.

This article has been published previously in First Command publications.

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