One of the most frequent questions I get as an active duty military member and real estate investor is “How do you evaluate rental properties in a military town when income levels are so varied and how do you know you can get it rented when you leave?” The answer is a long one, but one that is extremely easy to identify, in my opinion. I believe I have come up with a plan that takes almost all of the emotion out of the process and allows me to make a very informed decision to maximize my opportunities.
My plan has always been to buy a property to live in and then turn it into a rental when I leave. However, this doesn’t (shouldn’t) affect my process. If could make it more difficult, because we all want to live in a perfect house in a perfect neighborhood with a perfect yard, etc……Stick to the numbers and it will keep the emotion under check!
First, get to know the BAH rates. Not just for you, but for your target audience. When you leave, who do you intend to rent to? Are you looking for two or three E-4s or E-5s to rent your place or do you want an E-7 or O-3 family. Once you determine who you want to rent to after you leave, then you can start to work your numbers. One thing that is really nice about this method is it takes a lot of the emotion out of the deal very early on.
After you identify your target renter, look at the market and where you want to find a property. That will be driven by what commute you are willing to make and what commute you think your tenants will be willing to make. During this step, I would also reach out to folks at the base that you are joining. Ask them where the (insert your desired rank here) are living.
Once you identify your target area, start running the rental comps. Figure out what the average rent price is per bedroom, or square foot, to understand what service members in the area are paying for housing. Keep in mind that there will be variables which will affect this number, i.e.: garage, yard, pool, etc… You can also reach out to a property manager for this step. I would avoid asking your real estate agent as they can be conflicted. Reach out to a property manager that you get recommended by a fellow investor and ask them how much you can assume to get in rent.
Now that you have identified the best area to purchase, and rent comps in that particular area, you can work your numbers backward to figure out what you can spend in order to get into that area and still maintain your goals on the backside. There are things that you will want to consider when buying even though they won’t be a factor until you leave. For example, you need to factor in a monthly property management fee. Even if you can’t possibly imagine needing a PM, plan for it. It will cost you 8-10% of that monthly rent. Capital expenses are a big one that people usually forget. Plan for 10%. Does this area require an owner to pay any utilities? If so, factor that in.
Now that you have identified your target renter, target area, figured out what the rental comps will be, and worked your numbers backward to figure out what you can pay, you can start shopping for properties in that price range. What you need to remember, and I know this from experience, is that this should not be emotional. Many folks move to an area and want the perfect home in the perfect neighborhood etc… If this is truly an investment strategy for you, than there is no emotion. The numbers are the numbers. It has to work. You make money when you buy the property not when you rent it out, or when you sell it!
Now get out there and find that property. Not the property you are going to live in for the next three years, but the property that you are going to own for the next thirty years (or 20 or 10)…..