(This is part 1 of a multi series of upcoming posts about home ownership, VA loans, and how to profit while utilizing the benefits we get.)

As my rotation in this deployed location comes to an end, more and more I hear discussions about what people are going to do with their money.  Some are taking trips, some are buying new vehicles, and many are talking about home ownership.  When pressed on why they want a house in particular, the majority of them have the same answer.

“I am sick of wasting money on rent.”

Let me make one thing perfectly clear before we start any analysis with math, or hypothetical numbers.  Renting is NOT throwing away money.  Renting gives us the freedom, especially as military members, to walk away from one property to the other during PCS season, deployments, when our family size changes, or for whatever other reason.  It gives us the ability to not have a second thought about that AC breaking or how we will pay for the new water heater.  These things are especially important while we are thousands of miles away and are without the ability to make phone calls or even send e-mails.  Additionally, it gives us a chance to pack up the place and put everything into storage while banking that sweet, sweet BAH during a deployment.  Say it with me now.  Renting is NOT a waste of money.

“But look, the landlord is getting rich off of my BAH, I could be the one getting rich off of my own BAH!”

Come to a full stop there.  Owning a house is a risk just like any other investment.  Unlike the majority of other investments, it may be the LEAST liquid.  (Liquidity, in this sense, is used to describe how easy it is to convert an asset into cash.)  Additionally, you have to worry about things like vacancies, depreciation, buying/selling fees, and of course – maintenance.  

Now that that is out of the way, let’s look at some average numbers.

The median home in the US that is being bought/sold is $200,000 (as of June 2017) according to Zillow.  Of course, that number will ultimately depend on the size of the house and possibly more importantly location as well as some other factors such as the materials used and so on.  Since people are stationed from Travis/Los Angeles/Seattle/other HCOL areas to middle of nowhere LCOL places as well, this is the number I will use for the hypothetical situations I will calculate out.  $200,000 will cost you a VA funding fee of $4,300 if it is your first loan that is usually rolled into your mortgage.  In addition to the cost of the house, you will be responsible for paying property taxes and insurance.  They will typically be 1.2% of the home’s cost and .35% respectively.  A 30 year mortgage with great (720+) credit using today’s rate of 3.875 (or 4.047 APR) will ultimately cost you $1,219/month.  

Keep in mind that this will lock you in for 30 years (or until you ultimately determine to sell the property).  Additionally, taxes often go up and very rarely do they go down.  Insurance prices will also typically increase from time to time.  While these prices will not be significant, it is something to consider.

Additionally, (nearly) everything in that house is now your responsibility.  Please do not think that a home warranty will cover everything, either.  Home warranties exist to make money.  They will nickel and dime you as much as possible and will fight you about a replacement, even if it makes more sense to do that vs yet another patchwork repair.  So let’s bring up some of the recurring things you’ll need to fix.

1. Roof – possibly the most expensive regular item you will have to consider. Homeadvisor.com lists an average national roof replacement price of $7,164.  Warranties for most roof expire at 10 years, but they usually last for about 20 years.  That’s an additional extra total expense of $29.85/mo

2. AC – another pricy and regular item that needs repairs and replacements.  An AC usually lasts for about 15 years, although after the 10 year mark it may make more sense to get a replacement over a repair.  Average price is $5,230 using homeadvisor statistics.  Using the 15 year mark, that’s another $29.06/mo

3. Furnace – Using the same website to be consistent, their average price is $4,180.  Many AC techs will advocate for a furnace replacement at the same time as the AC.  However, the newer furnaces can last from 15-25 years, so I will use 20 years for this purpose.  This expense will add an additional $17.42/mo

4. Water heater – depending on what kind you get, this has a big difference as well.  A tanked water heater runs approximately $1,000.  A tankless is approximately $3,000.  Tanked water heaters last 10 years on average while tankless ones last for 20+.  The price per month then becomes $8.34/mo or $12.50/mo.  

5. Windows – Windows will typically be rated for 10-20 years.  Because windows are usually an afterthought for most people and do not get replaced until absolutely necessary, we’ll use the 20 year number for this.  Adjust your price accordingly.  An average window replacement house across the US is $5,011 or $20.88/mo

6. Flooring – this will likely have the biggest variance due to the greatest amount of choices on materials.  Carpet will need replacement more often.  Vinyl/Linoleum slightly less so.  Hardwood and tile will be the most resilient.  

1. Carpet – national average of $1,586.  California law dictates that carpet’s useful life is 8-10 years.  At 10 years replacement, the cost is $13.22/mo.  This does not include carpet cleaning in the meantime.

2. Vinyl/linoleum – vinyl lasts from anywhere between 10-20 years.  Linoleum lasts from 20-40.  Since most people care relatively little about their flooring unless there are serious issues with it, I’ll use the max time for both.  Their costs are similar and the national average for this replacement job is $1,362.  The monthly cost then breaks down to $5.68/mo and $2.34/mo respectively.

3. Hardwood flooring – Average price for this is $4,404.  The life expectancy really depends from 20-30 years for engineered wood or potentially the lifetime of the house with real wood, if properly taken care of.   Using a 30 years replacement figure (or maybe first install), this will cost you $12.23/mo

7. Appliances – your washer and drier, fridge, microwave, oven and the like will all need to be replaced with similar life expectancies of about 10 years.  After personally shopping for the above, I think $2,000 is a fair low range average.  This brings the average extra monthly cost to $16.67/mo.

8. Misc expenses – While truly unquantifiable, you need to consider things like sink fixtures, bathtubs, toilets, lawn care, interior and exterior paint, the occasional plumber/electrician/HVAC tech calls and the like.

Not counting item 8, this brings your previous $1219/mo to at least $1,343.56 if you use the low ranges of those replacements.  Going with higher ranges/quality items will increase that figure proportionally.  Do you know how much you pay for the above while renting?  In most cases – NOTHING!

Of course some areas are very obviously tilted towards owning almost no matter what the other circumstance are, but those areas are getting more difficult to find since investors will be looking to buy out those locations to rent out.  

Not counting those outliers, assuming you are ok with the above because you believe you are “building equity” and “paying yourself”, you have to consider what happens once you PCS.  Because you put 0% down, you have no equity in the house to start off.  The overwhelming amount of your payment will go into interest rather than the principal amount borrowed.  While you did not have to pay any kind of commissions while buying, you will likely have to pay them while selling.  The total average commission is 6% (3% to buying/selling agent) which amounts to $12,000 when selling that $200,000 house.  $12,000 will take you over 3 years – or 39 months to be exact – to reach if you are lucky enough to qualify for that 4.067% APR.  Still think renting is a waste of money?

Keep in mind that that those 39 months are for you to walk away from the house purchase with $0 to your name, even though you have spent at least $47,541 without counting ANY replacement/maintenance fees ($1,219/mo).  Unfortunately, I was unable to find any data on today’s statistics, but according to an article on militarytimes.com(1) from September 2015, the military moves at least half of its service members anywhere between 32-38 months.  Of course there are outliers, but this is strictly the average.  As you can see, that time frame is a bit lower than the 39 months you’d need to break even on that house purchase.  You also need to account for the time to sell.  While some housing markets close within a week of making the house available for showing, others take weeks and even months.  My first house, for example, was on the market for almost a year while the owner (a captain) continued to pay mortgage for an empty place throughout that time period.  Talk about throwing money away!

Of course, it is not all doom and gloom about home ownership.  Like I said before, you get nearly complete control of whatever you want to do with your place, which you can’t put a price on.  You also have a unique situation of buying a home without having to save tens of thousands of dollars or pay for Property Mortgage Insurance (PMI) and, given proper research, can turn it into a successful investment.  In the near future, I will be going more in depth over real estate investing and how the VA loan can be used to help.

The bottom line is that while ownership is far more expensive than it seems, it can indeed be more beneficial to renting, especially in areas where the rents are vastly over priced in comparison to the home of the houses.  It’s up to you to do the research necessary to see whether that is the case or not around the location you are at.  I am hoping that this will encourage folks to do that research instead of just jumping on the propagated train of thought that “renting is a waste of money”.

If you have rationally decided that purchasing a house is the best plan of action for you, I will be tackling what exactly the VA process entails and some of the issues you may face while going through the home buying experiences in the next post.

1. https://www.militarytimes.com/2015/09/12/pcs-costs-rising-across-the-force-even-as-moves-decline/

2. The reason why most averages are from homeadvisor.com is due to the direct responses of various members.  This seems to make sense to get averages from as all responses are based on multiple thousands of data points.

Credit (and credit cards – which I will tackle with the next post) related questions are rather popular in the military.  Many people that enlist or even commission never get told the details about credit scores and why it is better to have a good score.  We all know or at least heard of someone that buys a car out of tech school with 15-20% interest rate and is always short on cash.  Well, to prevent that from happening, having a good credit score is essential.   Hopefully this post sheds some light on the various basic questions about it.

So what is a credit score?

A credit score is a number that is based on a combination of various financial factors.  It is the most important thing when it comes to interest rates on auto, home, personal and any other kind of loans.  The most common credit score that is used is known as the “FICO” score (http://www.myfico.com/).  While this will be geared towards that particular score, you can apply the same fundamentals towards any other credit score aggregates.  Essentially, a credit score rates your “trustworthiness” to pay off debts.  The higher the score, the more you have demonstrated to not be a liability to lenders.  The FICO score ranges from 300-850.

Think of it this way – if two of your friends or coworkers came by and asked you for some money and you know that one is very responsible with finances, but he just had an emergency while the other is constantly asking people to borrow funds for daily expenses, cancels various plans because he can’t afford them, or even gets his car repossessed for missing payments, who would you rather loan that money to?  My guess is that you would pick person #1.  This is exactly what the credit score figures out.

Why is a credit score important?

A credit score ultimately governs most things in our adult lives that have to do with money.  You want car insurance?  Having a good credit score can (and usually will) decrease your premiums.  You want a loan on that cool new car?  A better credit score will lower your interest and save you money.  Home loan?  Credit score will determine your interest rate there as well – which will have an impact on the overall amount that you can borrow.  If you want a “premium” credit card for perks, the company will check your credit score for eligibility.  For the military specifically, not only can having a bad credit score prevent you from joining the military in the first place, but it can also jeopardize your clearance (if you have one).  It can also have an effect on renting a place, or even getting civilian employment after the military.

What affects my credit score?

While many financial situations affect your credit score, some are more important than others.  The most important thing in a credit score is your ability to pay your bills ON TIME.  This includes credit cards, loans, and even your phone bill or rent!  With credit cards or anything else you finance, it is important to note that paying the total amount is not as critical as making sure you at least make the minimum payments on all of your debts.

That does not mean, however, that paying things off in full is NOT important.  The second most critical thing to your score is the total amount you owe across all of your loans / lines of credit vs your available credit (also known as your utilization ratio).  The lower your utilization ratio is, the higher your score will be.  Because your utilization changes every time you pay on your loan or credit card balance, only the past month is used to calculate the score.  

After those two big ticket items, things like how long your line of credit has been open, the various types of credit that you hold and how many “credit pulls” (when banks formally check your credit) you have in the recent history as well as how many new accounts you recently opened.  

***IMPORTANT NOTE***

There have been multiple reports of credit cards not disclosing your balance to reporting agencies if you paid it off in full before it posts every month.  To clarify – if you make a purchase of $10 on the 2nd and pay it off completely on the 3rd, when your card closes out on the 5th, it will show you had no balance all month.  While you can pay off a little bit off during the monthly period, make sure you have a little left over for the time of the statement posting to ensure it gets reported.  Essentially, do not pay the CURRENT balance in full, but rather focus on paying the STATEMENT balance in full.

Misconceptions about increasing your credit score.

There are a lot of “armchair” experts about money matters, and credit is no different.  Some people will advocate for you to keep a balance on your loans to establish a “history”.  Others will tell you to get a loan just to “build credit” when you can pay off the item in cash.  Some will swear their credit score is (near) perfect and they just do not believe in a credit card… While these things will certainly impact your credit score, and as long as you pay at least the minimum balance every month will give even increase it, these statements are crap and your friend that may be advocating these things is a moron.

Let us start with keeping a balance.  This is a TERRIBLE idea if you can pay off the total amount.  Never carry a balance “just because”.  Since the average Credit Card APR is upwards of 15% and even having the SCRA caps it at a whopping 6% limit, you end up GIVING THAT MONEY AWAY FOR NOTHING!  While it is true that your credit score will go up by doing this, it is not because you are paying interest, but strictly because you are paying every month.  The bank does not count how much interest you have paid for the month, but rather just your balance and if you paid on time or not.  Thus, if you paid attention to the post above, paying off the card in full will still show that you are paying every month and will also lower your utilization due to having less debt to your name.

Getting a loan will do the same exact thing as above.  You are paying someone interest for no good reason and decreasing your total net worth (and thus worsening your utilization).  Do not do this unless you are getting a 0% APR loan as that is essentially free money due to inflation.

Lastly, we have credit cards.  Not getting a credit card can be advantageous if you have poor self-control and will feel the urge to max it out.  However, credit cards will give you the best “bang for the buck” towards your credit score due to having that extra utilization available.  i.e. if you have a CC that has a limit of $20,000 and you have nothing on it, you have an extra $20,000 you COULD be borrowing.  In addition, most cards will have some kind of “cash-back” or “bonus points” programs where you will make some of your money back.  I will address this more in depth in my next credit-card focused post.  Lastly, many credit card companies now give you a free credit score based on their available information.  While this will likely not be exactly the same number that a bank might get while doing an official inquiry, it is usually within 20-30 points.

If you have any additional questions or would like clarifications, feel free to give me a shout!