Point-Counterpoint: 6 Cons of Investing Near Military Bases
A new series of articles we’re calling “Point-Counterpoint” will focus on one real estate investing issue at a time from two different perspectives. This edition addresses whether it’s wise to buy property located near military bases. Is it a good idea or bad idea?
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This post discusses the cons from the perspective of an investor who has been there and done that. Weigh-in with your opinion below the article in the comment section, and be sure to read the entirely opposite stance here.
Some investors love to talk about how great it is to invest near military bases, but it’s not always what it’s chalked up to be. Here’s a list of some of the most common pitfalls of investing near military bases.
1. Military Orders
The biggest drawback to investing near a military base is the lease termination benefits provided to military members by the Servicemembers Civil Relief Act (SCRA). The SCRA allows service members to terminate their lease if they get orders to deploy or change stations.
Now, I’m not saying that the SCRA is a bad thing by any means. In fact, it has helped my family get out of places when we got orders to move, too.
It keeps military members from being taken advantage of, but it can really hurt you as a landlord if your tenant has a Permanent Change of Station (PCS) in the middle of the winter, when most people aren't house hunting. That can cause months of undue vacancy waiting on the next family to come around.
The biggest PCS cycles are typically in the summer months between the school years.
2. Basic Allowance for Housing
Basic Allowance for Housing (BAH) is a stipend that military members get from the government to pay for off-base housing. The BAH differs from base to base and fluctuates based upon the current market prices to rent homes.
For example, Hawaii BAH is far greater than Kansas BAH because of the higher cost of living. BAH typically goes up, but it can go down, too, and when it does, it hurts the rental market.
The BAH for military members has decreased 1 percent per year as part of the Department of Defense’s plan to have it cover only 95 percent of military housing benefits, while the service members cover the remaining 5 percent. This 1 percent per year over the past five years has accounted for a few hundred dollar changes in most rental markets.
In fact, this is something that impacted me personally. A house that we used to rent for $1,400 per month now goes for about $1,250, and it was solely because of the change in BAH. The cost of living never went down, but military families are now looking for cheaper housing, as they are feeling pinched in the wallet because of Uncle Sam.
3. High Turnover
Another major problem near military bases is the high level of turnover. You can reasonably expect, in most places, to only have tenants for two or three years at a time if you are lucky. This causes a lot of wear and tear in a house from multiple move ins and move outs.
Training bases can be even worse for turnover. Some PCS cycles are only for six months, so every half a year you can expect to market the rental and have new tenants.
Some property managers charge a placement fee around one-third of the first month’s rent. This is a costly event for you, especially if you are turning over tenants every six or 12 months.
4. Feast or Famine
Investing near a military base can be absolute feast or famine, depending upon the cycle that the military is in. If the base deploys, thousands of service members typically elect to get out of their lease and put all of their goods into storage to save money.
I invest near a military base that deployed two brigades at the same time. There went an estimated 7,000 service members and often their families from the community for about nine months, give or take.
More often than not, service member spouses and families will go back to their original home during extended periods of deployment and live for cheap with their other family members. (Seriously, it’s more common than you think.) This hurts investors because when that many people leave from a community at once, everyone’s house seems to have a “For Rent” sign in the yard.
I've seen it, and it has cost me a couple thousand dollars in vacancy for months, having no demand for the excess supply of rentals.
Investor competition is another huge problem with investing near military bases. There are always tons of investors looking to take advantage of the opportunity to own houses in areas that experience large volumes of changing tenants.
You often also struggle to compete with some of the D.I.Y. investors out there, who buy a house and undercut the market by renting it out without cash flow (or negative cash flow, for that matter). Good for them, but it’s not helping the typical investor’s strategy.
Military drawdowns (the equivalent of job cuts) are another huge concern when investing near a military base. You want to be careful not to put all of your eggs in one basket.
When the military cuts troops (which it eventually will), you will likely see a hit to your monthly rental income along with a huge shift in supply and demand. Soldiers will be forced out of the military because they don’t meet new stringent qualifications, and before you know it, the number of service members in your area has been reduced significantly.
There is always a chance of a drawdown; it’s heavily dependent upon the leadership agenda in Washington. For this reason, investing in a military town without any other main source of employment is risky.
Drawdowns are one thing, but sometimes units get relocated to other bases, too. And suddenly, there goes another huge tenant population.
Another negative impact that correlates with drawdowns is what is called Base Realignment and Closure, or BRAC. Periodically, the federal government will try to maximize efficiency by closing some bases and relocating soldiers to other bases.
This is something that is not really in your best interest as an investor, because you could get stuck with a mortgage that you can no longer cover if the remaining pool of prospective tenants are unwilling to pay the amount of rent you desire. Again, it’s a matter of increased supply and decreased demand.
As you can see, there are a ton of drawbacks to investing in a military community. I still invest near military bases, but my plan moving forward is to get to more “stable ground,” so to speak.
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Do you invest near military bases? How has it been for you? Are there any other pros and cons that you have experienced that I didn’t mention?
Feel free to leave a comment below!