My husband and I own a property in Las Vegas, Nevada. We bought this home when we moved to Vegas shortly after 9/11. We felt like we were really taking a chance on homeownership: after all, the mood of the country was fearful and uncertain. We weren’t sure if it was a good time to be making our very first home purchase, especially knowing the military would be moving us again in a few short years.
But perhaps some of you are familiar with what it’s like to even entertain the idea of buying a house when you’ve just arrived in a new area and are living in an uncomfortable TLF (Temporary Lodging Facility) (or even a hotel). You think, “Oh, we’ll just get a realtor and see what happens.”
We Found a Realtor
What happened is that we contacted a realtor using USAA’s MoversAdvantage Program… And very quickly the house hunting took on a life of its own. We found all of our energy going into procuring financing, researching neighborhoods, and the physical, exhausting labor of driving around a strange, new city looking at houses and trying to come up with intelligent questions regarding a very serious commitment. Completely forgotten were our intentions of also looking at houses or apartments to rent.
Note: The military does typically offer time off to go house hunting prior to the actual move; however, my husband had just finished OTS (Officer Training School) and we had only recently learned where his next assignment would take us. I do recall I at least researched the schools our then 6yo son would attend, but that was about it.
We Gambled and Took the Plunge
Before we knew it we found ourselves making an offer on a cute (read “small”), 2-bedroom, 2-bath house tucked into a cozy cul-de-sac in the northwest part of Las Vegas. The home was small for the area; the schools were good; the neighborhood was very new and “up-and-coming.”
Pros and Cons of a VA Loan
In order to make the offer, we first obtained a financial pre-approval through USAA as well as a Certificate of Eligibility for a VA loan. The advantages of going with a VA loan versus conventional financing is that a VA loan does not require you to make a down payment; and because the loan is guaranteed by the Veterans Administration you also don’t have to pay mortgage insurance.
The flip side of that is the funding fee that is required with a VA loan. Typically this fee is about 2% of the purchase price for the first loan; the exact figure can depend on the military member’s length of service. Should you one day sell this home, refinance it conventionally, or otherwise pay it off, it is possible to reacquire VA loan eligibility a second time, at which point the funding fee will be higher – typically 3%, but even up to 5% of the purchase price.
Another disadvantage to a VA loan is the notion that it takes longer to close on than a conventional loan (it doesn’t) and the requirement by the VA that the seller is to pay at least a portion of the closing costs. Both of these may turn off a seller to even entertain an offer by someone who plans to use a VA loan.
It was a Buyers’ Market
As I mentioned, we moved to Vegas right after 9/11. It was a buyers’ market, and we did not encounter any of the above problems during our negotiation with the seller. In fact, the seller even paid all of the closing costs! This is very unusual – though we had no idea of that at the time, first-time home-buyer newbies that we were.
But it was very fortunate for us that they did pay as we were very cash poor. What on earth were we even doing buying a home? I honestly have no idea, but we were very lucky because it all worked out, and after five very long weeks in the TLF on base we became the proud owners of our very first home worth approximately $120,500.00… as well as the owners of $123,420.00 in debt, when you included the VA’s funding fee that we rolled into the loan.
We Hit the Jackpot!
Even though we bought a home with no money down (sounds like a bad commercial) and knowing that we would be leaving in a few short years, we got lucky: property appreciation skyrocketed in the three years following our purchase. Our home value went up from our original purchase price of $120,500 all the way to $240,000. Woo-hoo! We hit the jackpot! You all remember this time, right? Houses were literally selling within hours of going on the market. Bidding wars made people do crazy things. It looked like our gamble had really paid off.
Time to Move Again
The original two years we were slated to be in Las Vegas turned into three, and finally it came time for our next PCS (Permanent Change of Station). In addition to our now 8yo son, we also had an 18mo daughter, and I was pregnant with our third child. Our little cozy two-bedroom house was stuffed to the gills and we were ready to move. This was 2004.
The housing market was on fire. Should we sell? Of course we should! But… we didn’t. It’s really hard to imagine now, but it seemed like the market fever would go on forever. The Air Force dilly-dallied with our orders for.ever. It was actually touch and go whether we were going anywhere that summer or not. Finally the orders came through – for Italy! We were so excited!
To Sell or to Rent?
It’s so hard to understand now, let alone explain. The orders weren’t cut until June. We found out we were supposed to leave the first week in August. I was pregnant and we had two children living in a very small space – the baby slept in our closet, for pete’s sake. It just seemed easier to rent the place out once we left rather than put it on the market to sell. What if we couldn’t close on it before we left? What if the buyer backed out, or something happened at the last minute? We wouldn’t even be in the country to deal with it. We decided to hire a local property manager and rent it out.
Fast forward two years to the summer of 2006. We decided to put the Vegas house on the market. As hot as the housing fever was when we left Vegas two years prior, our property value had not appreciated any more since we left. We felt ready to deal with a long-distance sale, with plans for one of us to fly over if need be to close the deal.
Nothing Good Lasts Forever
Then my husband got orders for a short-notice deployment, and we decided to wait once again. (You might notice that “last-minute” tends to be a trend for us?) When he got back seven months later, we made a half-hearted attempt to put it on the market, but we already knew what is now clear to everyone: after the summer of 2006 the housing market started to tank, and Vegas was hit hard.
On Being Long-Distance Landlords…
We are now on our fourth set of renters since we left the house over five years ago. We were not happy with the property manager we hired originally and have since switched to a new one. We jive much better with her in a business relationship… dare I say we also learned from our mistakes we made with the last one? She also only charges 8% of the monthly rent for her fee instead of the usual 10%.
The Truth About Tenants
We have had tenants break their lease without notice. We have had tenants break their lease for heartbreaking, life-and-death reasons. We have not, thank God, had truly horrible tenants who treated the place (too much) like a dump. My husband and I have been renters ourselves many, many times over the last 15 years. We always treated our home like it was… Well, our home. Sadly, this is not the case for all renters, and if you are a landlord you need to be mentally and financially prepared accordingly.
You Need a Property Manager
In between tenants we have gone months with no rental income. These months are very hard, though they were much easier when we lived overseas and our living expenses were subsidized in my husband’s paycheck. However, in addition to not having a rent check come in, we also incur extra expenses when the property is uninhabited. The lawn still needs mowed; the power bill goes into our name (it gets hot in Vegas!); and the grass still needs watered. Everything has to be contracted out because we aren’t there to do it ourselves. A professional property manager is indispensable; they have many contacts and often special rates for the different jobs that need to be done.
Crunching the Numbers
And the fees! Oh, Vegas loves Association Fees. We have two of them: one we pay monthly; another quarterly. We also pay some random “assessment” twice a year. Just to give you an idea of how all of this plays out, in the last 12 months the numbers looked something like this:
October 2008 – October 2009 Rental Expenses:
• $9,802 paid out for mortgage
• $1073 paid out for association/assessment fees
• $644.51 paid out for utilities
• $789 in miscellaneous expenses (such as preparing for new tenants: cleaning; painting; exterminating…)
You don’t have to be an accountant to notice these numbers are a little upside down. To the tune of $7,743.51… Because the property was empty for seven of the last 12 months!
I daresay that is quite unusual. Then again, this last year was not “usual” for this country in any sense of the word. When our tenants moved out last Fall, our property manager immediately set out to find new ones. We also advertised the property on websites for military members: Military By Owner, and AHRN. However, in our experience our local property manager has been more successful in procuring new tenants.
A property manager also screens the prospective tenants. Unfortunately, at the very time we needed new tenants was the time when so many people in Vegas (and the country) started losing their jobs. Qualified tenants were few and far between. As landlords, we couldn’t afford to take a chance on tenants who might not be able to pay the rent.
The Months Dragged On…
We tightened our belts and adjusted our budget and waited it out. That sounds simple, but it was hard. Very hard. We panicked a bit. We joked that we must be rich – after all, we owned a “vacation home” in Vegas. Ha-ha. We weren’t really laughing.
About the time we finally got a new tenant last Spring, I also discovered Dave Ramsey’s, “The Total Money Makeover”. It shook my financial paradigm and changed the way we looked at debt and credit and the way we tend to follow the advice of broke people. We took that first rental check and immediately started our debt snowball. We are well on our way to becoming (non-mortgage) debt free, though our mortgage debt does include a rental property…
Baby Steps, people.
We do hope to sell the house in Vegas sooner rather than later. (Any takers? Heh-heh…) We never intended to own it for the long haul. “Best Laid Plans” and all that. Right now we are just sitting tight. We really don’t have a choice – I believe the Vegas market is second only to Detroit in the number of empty properties due to foreclosures. It makes it difficult to gauge a “fair market value”.
Hindsight is 20/20
I am confident, though, that these houses will eventually find owners and property values will adjust to a normal rate. Is this what we bargained for? Certainly not! Do I wish we had taken the money and run back in 2004? Of course!
I am thankful, though, that because we bought the property during a down market ourselves, we are at least not upside in our mortgage. We have heard horror stories of military families who did buy homes in Vegas during the hype: then their PCS orders came; their property value plummeted well below what they owed; and renting it out didn’t begin to cover the mortgage payment, let alone any other expenses. These people are experiencing a real hardship.
Where We Are Now
We have learned so much in this process over the years. I am so grateful for the position we are in right now, both financially and with our relationship to money in general. Truly, this is all fleeting. To say that we really missed our ship that came in back in 2004 would be missing the point, I believe.
Owning investment property is a huge responsibility. We may have ventured into it with eyes wide shut, but they’re open now. Hopefully we will use the lessons we’ve learned to continue to be better and better stewards of what we’ve been given. Which is, I think, the real point.