by Captain Aaron Stark, United States Army
Editor’s Note: Frequent moves often involving quick decisions—such is the realm of our military and their families as they PCS across the globe. Captain Stark urges careful planning on what you may already be debating: whether to rent or purchase a home?
If your military family is a typical one, chances are you have moved about once every two to three years. With the many stresses associated with moving, one of the most difficult decisions can be whether to buy a house or rent one.
The typical advice I’ve received throughout my career has been: buy a house and then rent it out when you move. The tenants will pay your mortgage, the house will gain value—it’s a great investment. But is that fundamentally sound? You wouldn’t buy a new car while thinking, I’m not quite sure why I should buy a new one, but my neighbor said I should because it’s smart. No, you would do the math to determine if the car is affordable.
Biblical wisdom instructs us “the borrower is slave to the lender” (Proverbs 22:7). By taking on debt in the form of a mortgage, we are introducing additional risk to our lives. Here are common pitfalls associated with owning a rental property and some ways we can be wise stewards of the resources God has given us:
Myth #1: My tenants pay my mortgage
Many property owners mistakenly assume that as long as a tenant pays the mortgage, they’re making money. But in reality, after all other expenses such as maintenance, insurance, taxes, and utilities are added in, most owners actually lose money. These expenditures can easily cost the owner 30-40 percent of the mortgage cost, meaning you must charge a tenant 130 percent of your mortgage payment—which may not be possible in competitive rental markets.
Myth #2: I will have a tenant every month
You may plan for a tenant to cover all of your expenses, but it’s a guarantee that your house will be unoccupied at some point. If a house sits empty for just a few months every couple of years, you could still be left with a big loss.
Bottom line: Unless you’re able to account for these losses over time, you could cumulatively lose thousands of dollars.
MYTH #3: I should not pay any extra on my mortgage because I will make more in the market
Would you rather have a paid off rental property earning you $1000 a month or unpredictable mutual funds? Many people assume that by investing in the market, their investments will increase the historical average of 11 percent a year—which is far from the case in today’s economic climate. But your mortgage is costing you 4-8 percent interest every year! A house paid on schedule over thirty years can easily double the cost of the original sale price after interest is factored in, meaning thousands of dollars that will go to the bank rather than your pocket.
And it’s important to remember—a paid-off property cannot be foreclosed on if your financial situation changes unexpectedly. As financial expert Dave Ramsey says “100 percent of foreclosures happen to people with mortgages.”
Myth #4: I can depreciate my rental property and take a tax deduction
You can deduct the “depreciation” of your house every year on your taxes. However, when you sell it you will also have to pay some of that back to the IRS because it now counts as income, costing a homeowner more than $10,000 in taxes after the sale of a property.
Myth #5: I can deduct the interest from my mortgage on my taxes
This makes the least sense of all the myths. You can indeed deduct a portion of your interest (interest x tax rate = deduction). But you are losing $8,000 a year by essentially paying the bank $10,000 a year to avoid paying the IRS $2,000.
Investing in rental homes can be an excellent income, yielding significant returns, for the prudent ones willing to first save before buying, and then diligently devote all resources to paying off the debt as quickly as possible.
Investors minimize that time that “the borrower is slave to the lender” by planning to pay off mortgage debt early. In addition to warnings about being a debtor, the Bible also instructs us about actually having the resources to finish what we start, “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?”(Luke 14:2).
Aaron has a Bachelor of Science degree in Economics from the United States Military Academy and is a 2007 winner of the USMA Distinguished Thesis in Economics Award. To contact Aaron for more information on the mathematical examples behind his article, send an email to: firstname.lastname@example.org.