The real estate crisis has turned many military homeowners into reluctant long-distance landlords, but having a tenant cover your monthly mortgage payment can yield long-term dividends.
Major R.J. and Elizabeth Garcia successfully bought and sold homes throughout the first 10 years of their marriage as the Army moved them to eight different military posts. They bought their first home in Savannah, Ga., soon after they were married in 2002, sold it 15 months later and bought another home in Woodbridge, Va., which they owned for 19 months.
“For the most part, we have really, really lucked out and bought and managed to sell,” Elizabeth Garcia said. “In some instances, we were able to do well on the house when it sold or at least break even. We actually did quite well right before the bubble burst in Washington, D.C. We walked away happy with our experience there.”
Their luck changed in March 2008, however, when they bought a 3,400 square-foot-home in Harker Heights, Texas. By the time their permanent change of duty station orders to the U.S. Military Academy at West Point were in hand, the housing market had nosedived in the Fort Hood area.
“When we bought a home at Fort Hood, we could tell the climate there was changing,” Garcia said. “It had not really been affected and then right when we bought, it definitely started to change. The real estate market was not doing as well as hoped. This was our first time deciding not to sell.”
While becoming a long-distance landlord was not part of their original plan, the Garcias have weathered the transition with ease. Their first step was listing the house for sale on MilitaryByOwner.com, a website focused on military homes for sale and houses for rent near military bases.
“Within minutes to hours we had people saying, ‘I’m not in the market to buy, but we’re very interested in renting,’” Garcia explained. “We had so many inquiries so fast that we looked at our situation and thought maybe we should look at the house as a long-term investment.”
The features that attracted the Garcias to the house are the same qualities that gave it widespread appeal as a rental property. It is great for entertaining, has an updated kitchen with granite countertops and stainless steel appliances and is located on a cul-de-sac in a top-notch school district.
Their tenant is a fellow aviator whose family was looking to rent a home for two years in Texas because they were forced to rent out the house they own in Washington, D.C. While a military connection does not guarantee a hassle-free tenant-landlord relationship, Garcia says there are benefits to sharing similar situations.
“We were all currently in the same predicament,” she said. “He is trusting another family with his home, just like we’re trusting him in ours. They’ve been fantastic. They probably take better care of the house than we did. As far as I’m concerned, we couldn’t have had better renters.”
While converting a house to a rental property is often a last-ditch option for military homeowners, today’s tight rental market means that rental houses are in demand, especially homes with rental prices that fall in line with typical military housing allowances.
“It’s the old supply and demand situation,” said William Hurt, broker owner of ERA Shields Real Estate in Colorado Springs. “As more people choose to rent – in many cases they were unable to sell their home where they were coming from – they become renters on this end as well.”
Low mortgage rates have been an added bonus for many military landlords, allowing them to refinance and reduce their monthly costs.
Army Major J.T. Edwards and his wife Melissa decided to rent out their four-bedroom, 2,800-square-foot home in Colorado Springs last year rather than sell it at a loss. However, by refinancing their mortgage, which lowered their interest rate from 6 percent to 3.89 percent, they shaved $500 off their monthly payment and added to their positive cash flow. Meanwhile, the home’s value has rebounded roughly $45,000 during the time it has been rented.
“We should be OK,” Melissa Edwards said. “Plus, everything we charge [in rent] over our mortgage we’re putting directly onto the principle so we actually will make more money when we sell that house.”
Ken H. Johnson, finance professor at Florida International University, says research proves owning real estate builds wealth, but not for the reasons most people assume.
“It is not really the property appreciation that creates wealth,” Johnson said. “That’s the myth. What we’re finding every time we do studies is that the real wealth increaser is not property appreciation. It is not the tax write-off. Those help, but not to the point you would think. What really creates wealth is having the loan paid down. It is a forced savings account.”
Johnson acknowledges that having a tenant pay your mortgage is even better.
“When you have somebody pay into your savings account for you, that is a good thing,” he said.
Army spouse Heather Armour and her husband Jason, a staff sergeant, agree. They bought a three-bedroom, two-bath house in 2006 in Augusta, Ga. Despite the real estate market’s ups and downs and an overseas tour to Germany, they have not considered selling the 1960’s era home. Instead, when they left Fort Gordon in 2008, they turned the house over to a property manager who had the house rented within two weeks.
While the property manager’s 5 percent fee adds to their monthly expenses, Heather Armour says the money buys peace of mind.
“Every once in a while I wonder how the house is doing, but we’ve grown to really trust the property manager,” she said. “She’s a little bit hands off with it – I am not going to bug you if you aren’t going to bug me. We were thankfully able to also establish a trusting relationship with the tenants and have not had any issues.”
Armour is a firm believer in the value of real estate, an idea instilled in her by her grandfather who preached, “Buy land. They don’t make it any more.” Her original goal of buying an investment property at each duty station has been tempered by the realities of homeownership, but her enthusiasm for real estate investments has not waned as she continues to survey the market for another buying opportunity.
“It’s definitely an option,” she said. “We keep an eye on the market and try to have a feel for what is going on in the communities where we live, where we would like to live, where we have lived before and where we have family living just to see if there is an opportunity.”
One reason Armour can consider adding to her real estate holdings is that she has tight control over the family finances. She has taken full advantage of the myriad of financial readiness programs available to military families, ranging from Dave Ramsey’s Financial Peace Military Edition to personal financial readiness classes offered by Army Community Services. Putting the debt reduction lessons to work, she is on track to have the Georgia house paid off in another seven years, less than halfway through a 30-year mortgage.
“I have a payment schedule that is completely feasible where, if we want to, we can have it paid off in about 6.5 years,” she said.
While not everyone will be able to duplicate the Armours’ financial discipline, Johnson says a landlord must be prepared to weather financial storms since a bad tenant can be costly.
“I’ve had tenants where I think if I ever get these people out of my house, I am going to sell it,” Johnson said. “When you have a good tenant, it is the smartest investment you can make. When you have a bad tenant, your return isn’t as good.”
By Andrea Downing Peck