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By Joe and Deb - VR SAM on 3/11/2014



By Joe Gladden, Captain, USN (Retired), Realtor

Founder, Veteran Realtors Serving America’s Military, Inc.


There is obviously no answer that fits all situations to this often ask question. With the recent “flattening of the market” and higher interest rates, this question is being ask with greater frequency by military families. Among other factors that impact the answer are:


  • Length of PCS orders and / or likelihood of re-tour or retirement in area of the base

  • Strength of local economy

  • BRAC issues affecting specific military bases

  • Interest rate trends

  • The prospective home buyer’s cash position

  • The prospective home buyer’s total family income

  • The prospective home buyer’s tax bracket

  • The prospective home buyer’s tolerance for risk


It is no secret that nationally real estate prices have flattened considerably, and in some cases declined. An interesting phenomenon occurs in a declining market whether it is the stock market or real estate market…the herd mentality sets in and everyone rushes to sell! Those not in the declining market are very reluctant to invest in that market…and begin to search for rentals.


Nationally over the past four years we have observed everyone rushing to catch the huge appreciation as the market catapulted skyward on what seemed to be a never ending, accelerating, appreciation spurt! “Hurry and get into the market before rates and / or prices increase to the point where you can’t get in!”


In just a moment we will construct a straw model of a buy vs. rent scenario, but first we should acknowledge a few facts:


  • Generally speaking, when interest rates rise, so does the cost of a home mortgage. Thus renting appears to be more attractive than purchasing. Subsequently, the inventory of rentals decline, as the inventory of homes for sale increase. This increases the competition for rentals locally, driving up the cost to rent. Conversely, the home for sale inventory increases, forcing competition and downward pressure on home sale prices as they become more negotiable. Ultimately, lower home sale prices equate to lower mortgages, which equate to lower monthly payments given a specific interest rate.

  • No one, repeat no one, can predict with certainty where any market will be two to three years in the future. However, a very safe assumption, based on the “laws of supply and demand” is that despite periodic market fluctuations, real estate prices will continue to increase over time as they have for the past century. The simple fact is that there is a finite amount of real estate, and a growing population who must live somewhere.

  • No investment is without risk!

  • Real estate investments have an inherent tax advantage vis a vis most stock market investments. Military families may have an additional capital gains advantage (see Armed Forces Tax Guide Publication 3) due to the unpredictability of transfers.

  • Warren Buffet did not get rich by buying at the top of the stock market. He got rich by ignoring the “herd mentality” and buying undervalued stocks that were well positioned for growth.





Caveat: We are not tax advisors. Everyone’s tax situation is different and if you have any questions, you most certainly should consult your tax advisor / account to determine how buying vs. renting would affect your taxes!



Senario: O-4, 10 years, with 3 dependents, PCS 3 year orders


Base Pay: $5482

Spouse Income: $2500


Total Taxable Income: $7982/mo $95,784/yr

Assume tax bracket of:25%


BAH: $2470

Total Income: $10,452 $125,424/yr

Annual Tax Liability Before Puchase (25% of $95,784) $23,946


Home Purchase Specifics / Interest Only Loan (for simplicity)


Sales Price: $420,000

Down Payment: $20,000

Loan Balance: $400,000

Interest Rate: 6%

Term: 30 years

Monthly Interest: $2000 $24,000 / yr

Taxes: $300 $3,600 / yr

Total Annual Tax Deductions from home ownership $27,600 yr


Insurance: $50

HOA: $40


Total Payment: $2390


Home Rent Specifics


Monthly Rent $2000 $24,000 annual


Cash flow before tax considerations $390/mo $4680 in favor of







After Tax Analysis


Annual Interest Paid = $27,600 in a 25% tax bracket yields an annual tax liability reduction of $6900 resulting in an annual net advantage of $2220 ($6900-$4680) to purchasing. The three year purchase advantage is $6660.


Appreciation Factor


Assumption: $420,000 home, annual appreciation of a MODEST 3% (compounded annually)


Home Value at the end of 3 years approximately $458,945, an increase of $38,945.


Assumption: Realtor Fees and closing Costs at $29,500. Net after fees from appreciation = $9445.


Three year tax advantage $6660

Net appreciation $9445

Net 3 yr advantage to purchase vis a vis renting $16,105


Of course it doesn’t always turn out this way. The advantage can be significantly greater, or you can even lose a substantial amount of money! Been there, done that on both counts!


I will close this article with a true anecdote about a close personal friend who served 30 years in the military. Bet you know someone just like him! Over the years, he purchased four homes, rented three of them out (to other military members of course), and sold one near the end of his career. Two of the three are completely paid off, and one is half paid off. Combined, the three properties are worth well over $1,000,000 and generate approximately $36,000 in annual income. He did not get the huge 20% appreciation bumps of the recent “boom” market, but rather, plodded along at more modest appreciation rates. Like any other investment, buying and holding real estate, if done in a thoughtful, disciplined manner can be an excellent investment and supplement to a military retirement.


As always, we welcome your thoughts, suggestions, phone calls, and emails.



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