Reader Question: How do we get over the fear of buying?

Posted: August 23, 2013 in Buying, Uncategorized

In response to the previous blog To live on or off post? THAT is the question!

Reader Question submitted by V.:

I really liked this pros and cons article, but I really feel that buying a house is a risky investment if you are not experienced with the market (or being a landlord) and if you are eventually moving away. A mortgage is a big investment that demands a lot (if not all or more) of someone’s BAH. If you buy a house and cannot find a buyer or a renter that pays whatever your monthly mortgage loan is, you are in a problem that might lead you to financial ruin. Then you might lose your house and your credit score, making you ineligible for other mortgages or loans and sometimes making it hard to even rent a place.

I put together a list of my own (and my husband’s) fears and what eventually made us put on hold the dream of buying a house:

Scenario: you bought a house and now you need to move – risks:

  • value of your house decreased (due to crime rates/worsening of school/construction);
  • you bought a overvalued house;
  • your house is not what the market is looking for;
  • you cannot find a buyer and you have to pay your loan;
  • you cannot find a renter to cover your monthly payment;
  • your renter does not pay in time or does not pay;
  • your renter is decreasing the value of your property;
  • you do not have enough money to pay for the maintenance of the house;
  • you spend a lot of your savings on the maintenance of that house
    your rent gives you a lot of work and too little profit;
  • military towns may bring short term renters and you have periods of no rent;
    your rental admin is not helping you enough and/or is too expensive;
  • you need to rent another house for yourself, but your BAH is going towards the other house in which you do not currently live;
  • you might not be able to use VA loan anymore, not have the full entitlement available, or have more restrictions;
  • you might need to go back/stay in Clarksville in order to have a place to live;
    leaving the military might be a even harder decision because you have such a great responsibility (considering you and your wife might not have a job when you leave).

Ariel, how can we become more confident about those factors and make this investment a less risky one? (courses, insurance, professional help or service).

Ariel Anderson, Realtor Responds:

Dear V.,

I think you pose some very important questions and would like to take the opportunity to address them from a personal perspective, as well as from a Realtor standpoint. I appreciate you for taking the time to ask, and truly believe that if we had more people in America who handled their finances in a serious manner, we could have avoided a lot of our country’s financial crisis over the last several years.

First, I would like to give you a bit of my background. At 22 years of age, my husband (an E4 at the time) and I bought our first home. A year later, we bought our second. I was a college graduate, working the front desk at a hotel, and had no real estate experience. It was pure dumb luck that we made some smart financial decisions along the way. I speak more about that and my recommendations for going from Military Homeowner to Investor in a two-blog series beginning here: Military Homeowner to Investor (Part 1) and Military Homeowner to Investor (Part 2).

Second, I would like to acknowledge that any investment is a risk. However, to acquire large gains, you must sometimes take on a bit of risk. That does not mean that you have to do it in a risky way. Does that make sense? There is always the chance that your property can decrease value. Normally that happens in the short term (just like how the stock markets go up and down on a daily basis), but over the long term, property is one of the only investment options that appreciates. That new car; the value drops as soon as you drive it off the lot. Yes, the house and physical structure will take maintenance and updating over time, but the value of the land will typically always exist. It is important to do your research and get guidance from a professional. There are different towns and areas of town that seem to retain their value better. Usually there is a real estate association or board that has statistics available to you. If the average days on the market for a particular area or town is 365 (and it has been that way for the past couple of years!), you may want to reconsider. If your realtor pulls comparable homes, and 10 out of 12 that you can find are foreclosures, or short sales, then that is a risk you might not be willing to take. Not to say that the market can turn in those areas, but you may be looking at a more long term commitment before it does so.

A short note about property management companies: they can be a great deal of assistance, or they can prevent you from meeting your goals with your investment home. A typical management fee is 10% of the monthly rent. Remember that almost everything in real estate is negotiable. The great thing (for a property owner) about the Clarksville, Tennessee and Fort Campbell area is that rental rates are extremely inflated across the board. If you buy now, with interest rates at historical lows, you may be able to get a reasonable amount more than what you pay in mortgage. Even as inexperienced as we were when we first started, we chose to manage our properties ourselves. I had to decide between taking a little more responsibility for our properties and making more money from them, or relinquishing the control and occasional headaches in exchange for a monthly fee.

One great attribute of a military community is that the rental market is normally robust. There are lots of families that make the same decision as you. They are afraid of moving and having such a large, immobile commitment. There are many families who want to rent from a military owner directly, rather than from a property management company. It is that unspoken code; the brotherhood and sisterhood of the military. Recently I helped a military family convert their home into an investment property, and purchase a larger home. She posted her rental on several of the Ft. Campbell Wives Facebook pages and had it rented within 24 hours. It is not our experience that the military town has brought short term renters. In fact, for the last several years we have had two families renting from us who were not military. There are a lot of military families in Clarksville, but there are a lot of civilian families too. Even so, with budget cuts and the Army’s announcement to lengthen tours, I think we will see many families who are here to stay.

When it comes to renters possibly damaging the home, it is our personal belief and experience that if we treat our renters well, they will in turn, take care of our properties. I try to establish a relationship with them; we send holiday cards, thank you notes, and check in with them occasionally. I have also been known to say, “I don’t really care what is going on behind closed doors as long as they continue to pay their rent (our mortgage)”. Part of what I speak of in Military Homeowner to Investor (Part 2) is expecting to have problems along the way. You don’t have to be a “Negative Nancy”, but expect that when someone moves out, you will probably have to replace the carpet. Then when you don’t, what a nice surprise! The most wear and tear issues we have had have been paint and flooring. Both are fairly easy to fix with a little advance planning.

One way to avoid the risks of high maintenance costs is to buy a newer home. That is the direction we have taken as property investors. If you or your partner or family excel in home maintenance, then it may not be as big of a consideration. Wiring, HVAC, ducts, pipes, and appliances are more updated, they meet code requirements, and will normally present a lower chance of problems.

I think you have done a fantastic job exploring the pros and cons of military homeownership, and I appreciate your willingness to be open with my other readers which may help someone else along the way as well. Now, let me paint the other side of the picture…

Scenario: you bought a house, you need to move, and now you can sell it or convert to an investment property – BENEFITS:

  • the value of your property increased over time;
  • you had a great realtor who assisted you with finding a home that was appropriately valued, and you may even have some equity in it;
  • you have maintained your home well, it looks fresh, updated and is rent-ready;
  • you have enough equity, and appeal in your home that you can choose between selling or renting it;
  • you bought when interest rates were historically low, which gives you the option to offer a loan assumption when interest rates are higher in the future, which is a great incentive (a qualified buyer that assumes your loan, takes complete responsibility and gets your interest rates, while you receive your VA entitlement back)
  • you put a rental ad up and have more interest than you can keep up with;
  • your renter sets up an allotment, so rent is consistent and received on time;
  • your renter is responsible, has a good landlord-tenant relationship with you and treats your home as if it were theirs;
  • you have planned for occasional maintenance needs and are prepared when they arrive;
  • the additional rental income that you receive is padding your savings account each month and building your credit score;
  • due to the extension of tours, you have long-term renters and low turn-over;
  • you choose to manage your property individually and develop a team of people to help when you need it;
  • you can use your rental income to off-set your debt-to-income ratio improving your financial status;
  • you have maintained your credit and are eligible for a second VA loan or any other loan of your choice (USDA, FHA, conventional, etc) when it comes time to expand your investment portfolio;
  • you are fully prepared, your home is rented, and you are able to PCS with peace of mind;
  • leaving the military when you decide to is an even easier decision because you have invested wisely while you were young, have a comfortable nest egg, and have set yourself up with a generous retirement income.

V., I hope this helped or at least gave you some information to consider!

motivational-quotes-dream-it-wish-it-do-it

If you are in or heading to the Clarksville, Tennessee or Fort Campbell, Kentucky area, enter your information below to explore your real estate options today!

© Ariel Anderson and https://buyorsellclarksvilletennesseehomes.wordpress.com, 2013.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Ariel Anderson and https://buyorsellclarksvilletennesseehomes.wordpress.com with appropriate and specific direction to the original content.

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