The Three to Five Year Rule

January 26, 2010
By Jacey Eckhart
 
We rented our house in San Diego from a pair of Navy chiefs. Considering the view, the excellent schools and the lack of other options, the rental seemed like a wicked bargain.

Until the rent tipped over $3000 in the second year.  Then I tipped over, too.  I couldn’t stop thinking that for $3000 a month I could have owned that house.  For $3000 a month, I could have owned a better house.  For $3000 a month I was paying the chiefs’s mortgage so that they could afford an even better house in a gated community. 

Now no one finds Navy chiefs more deserving than I do, but renting made me feel like a fool.  My husband kept explaining that the chiefs had been stationed in San Diego more than eight years and planned to retire in San Dog.  He would grab the Kiplinger’s guide, the USAA guide, and every other real estate guide that cited an expert invoking the Three to Five Year Rule:  You need to plan to live in a house for three to five years before you can expect to make a profit. 

“But that isn’t fair,” I told Brad.  “We have moved every 1.37 years so far.  The average military family moves every 2.5 years.  If real estate is supposed to be a good investment, and the military cares so darn much about our finances, how are we supposed to move so often, buy a house, and hold it for three to five years?”

“Fair is what you pay to get on a bus,” Brad said with a shrug.  But I knew he was already thinking up ways that he could work even harder to make even this real estate market work for us.

He’s nice that way.

I was still indignant on his behalf and on the behalf of all those who work and move within the military.  I’m nice that way, too.  The military knows the Three to Five Year Rule as well as we do.  So are we boots-on-the-ground types still supposed to take on all of the risk of real estate knowing how likely we are to PCS?

I spoke to several real estate experts and all confirmed that the Three to Five Year Rule was the thing to follow.  When it comes to real estate, the short time frame ought to be our dominant decision maker.  Yet all these experts pointed out that it was possible to make a profit and that if you fail to get in the real estate market for the 20 years of your career you will be at a disadvantage compared to buyers who have been building equity all that time.  The incompatibility of those two ideas was making me drive up and down my street taking potshots at real estate signs.

Then Certified Financial Planner Patrick Beagle brought me up short.  “There are certain sacrifices you make for the job you keep,”  Beagle told me sharply.  The guy sounded just like the retired Marine that he is.  Beagle  is the owner and Managing Director of WealthCrest, a planning and investment advisory firm located in Northern Virginia.  The guy holds two masters degrees and specializes in the finances of military families. 

Beagle took the time to clarify all the math of the Three to Five Year Rule.  Then he explained that in less than three years you really expose yourself to a lot of risk.  “The shorter the duration, the higher the risk, ” Beagle said

So what about military people who do make a profit on real estate?  Brad and I, in fact, have made a profit on two of the houses we’ve owned.

“All real estate is local,” said Beagle.  “ If you got to a place during a time in which there is potential to gain, maybe it’s OK.  If you are going to buy in a place and hold it and then return, maybe it’s OK. “  Beagle said that the key is that we all have to remember that the military is not so good about lining up their plan with our plan.  And they never will be.

Those of us who do want to own our home and be in the military at the same time must keep the Three to Five Year Rule firmly in mind before we buy. While we buy.  After we buy. We have to know that is the rule.  We can’t blindly buy a house thinking it is an investment.  Instead we have to buy an investment and figure out who is going to live in it.  And pay for it when we PCS.