Understanding The BAH Formula

As we all anticipate the release of 2014 Basic Allowance for Housing (BAH) rates, it seems to be exactly the right time to review how BAH is calculated.

If you don’t understand, it certainly seems random:  How can rates go down if your landlord is raising the rent?  How can one rank have rates go up when another rank has rates go down?  I’m going to try to explain this simply without making it a million pages long.  There are two basic parts to the equation:  how the cost information is collected, and how the collected information is used to determine the rates.

STEP ONE:  Collecting the Cost Information

BAH rate calculations include three parts:  rental housing costs, utility costs, and renters’ insurance costs.

Rental Housing Costs

The Department of Defense hires a contractor to survey approximately 400 rental markets each year.  The contractor is looking for average rents, utilities and rental insurance costs for six different types of properties:

  • one bedroom apartments,
  • two bedroom apartment,
  • two bedroom townhouse,
  • three bedroom townhouse,
  • three bedroom single family house, and
  • four bedroom single family house.

Data is collected during the summer, when the housing market is most active. In order to make sure that it is collecting data that is representative of appropriate quality housing, the contractor looks at the average income in an area when selecting the housing to poll, and tries to select neighborhoods whose average income is roughly the same as comparable military members.  The survey excludes any housing deemed substandard, including mobile homes, efficiency apartments, furnished rentals, income-restricted housing, seasonal housing, and age-restricted units.

In order to verify all of its rental cost data, the survey includes information about actual, available rental units, and also includes input from area real estate professionals, the installation housing office, and the installation leadership.  Review by the housing referral office and the installation leadership helps to ensure that the data isn’t including unsafe or inappropriate neighborhoods or units.

Once the rental cost information is collected and processed, there are on-site reviews of the information collected to ensure that it is accurate.

Utility Costs

Information on utility costs is obtained by using:

  • rates from the local utility provider,
  • consumption information from the annual American Housing Survey (AHS) performed by the Bureau of the Census, and
  • climactic information from the National Oceanographic and Atmospheric Administration (NOAA).

Armed with these three sets of data, the DOD considers the climate and average consumption, then applies the prevailing utility rates to estimate utility costs.

Effective 1 January 2015, the cost of renter’s insurance is no longer included in BAH calculations.

Renters’ Insurance Costs

Rental insurance costs are calculated using estimated values of household contents.  These estimates are based upon income categories, dwelling types, and dwelling sizes.

Once the cost data has been collected, then it is on to step two:  calculating the 39 different BAH rates for each location.

STEP TWO:  Calculating the BAH Rates

Once they’ve figured out average housing costs for each location, then there is the calculation of the BAH rates.  There are 39 different BAH rates used for each specific geographic area.  That’s a lot of numbers.

First, there is a formula for how much housing would be required by a typical servicemember of a particular paygrade.  Each paygrade is designated an amount that corresponds to a specific size housing unit, or a percentage between two housing sizes.

  • An E-6 with dependents receives the rate for a three bedroom townhouse, as does an O-5 without dependents.
  • An E-4 without dependents receives the rate for a one bedroom apartment.
  • An E-1 with dependents receives the rate for the midpoint between the cost of a two bedroom apartment and a two bedroom townhouse.
  • An O-3 with dependents receives the rate for a three bedroom townhouse.

The designation of “how much house” might be required at each paygrade is the subject of much disagreement.  Whether you think it is too much, too little, or just right, that’s the determination upon which BAH rates are calculated.  For more details and the formulas for each rank, see How Much House Do You Rate?

I know it often seems like the changes in BAH rates don’t make any sense, but you can see that there is a lot of research and statistical information that goes into making these rates.  I can’t imagine a more accurate or fair system, even if it often seems wacky.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • jaime

    I am currently enrolled at Heald College in san francisco. the 2014 BAH there is 3369. Today i received BAH but to my surprise I was given the BAH rate for 2013. Why?

    • Angela

      I’m no expert, but according to the time of your post your school year would have covered the 2013-2014 period. I think this new rate is effective for the 2014-2015 period. In other words beginning this fall, you should see the increase.

  • Ruth

    When will we see the new bah rates go through on our LES? Considering it did not show up on our first of the month pay, will we see it on the 15th of January?

    • Bethany

      The new BAH rates take effect on 1 January so you should see the change in your 15 January pay and it will show the new amount on your January LES. It doesn’t show up on the 1 January pay because that is the last half of your December pay.

  • NY1938

    Hello. I’m in the military, was stationed at Ft Belvoir. Upon receiving unaccompanied orders to Korea, my family moved to New York City and conducted a rental agreement, then returned to Ft Belvoir a week later for 20 days to clear school and a NAF (base) job. They went on vacation to the Philippines and then switched from BAH to OHA after two months. Is there anything wrong with the first portion; rental agreement and payment in NYC for a week, then returning to Ft Belvoir to finish the 2 weeks notice at the job and kid’s school? I had to clear post still. Plan was to return to New York after vacation, in which we all flew from the Ft Belvoir area so that we can fly together (my PCS ticket and their individual tickets). I couldn’t get government-funded tickets from NYC.
    P.S. This sounds rushed because it was. October 2013 Gvt Shutdown and then Orders Rush in NOV/DEC. Thanks for your time.

    • Kate

      I am confused, and I’m not sure of your question.

      Your BAH should have remained at the old rate (Fort Belvoir) until your family started receiving BAH at the new location (New York.) There was no reason for OHA to happen, unless you were living off base in Korea.

      Your government funded transportation is from your old base to your new base. You can usually work around leaving from other locations, if the cost is the same or less, or you can usually pay the difference. All this has to be worked out at the time of ticketing.

      I’ll try to answer your question if you help me figure out what it is.

      • NY1938

        Sorry. I tried to compress the details and did a horrible job. All of us in personal house at VA. Received orders to Korea. My family moves to NY (Home of record) pays and completes a rental agreement. Comes back after a week to properly quit her NAF daycare job. I’m clearing (outprocessing) from FT belvoir and prepping my house for a renter. I sign out on PCS leave and we all fly from Belvoir to overseas. Me to Korea and them to Philippines I report to Korea barracks while they visit family in Philippines and decide to stay; switching to OHA. They weren’t going to fly with me, but I crashed my car and wound up getting a decent amount to buy their airfare from the totalled compensation. It is crazy timing. I was going through some tough moments during my time at belvoir, and the VA traffic did not help.

  • Nate

    Some of the issues with this way of doing things are:__A) There physically aren’t some of these options in the areas specified. For example, if base housing is full at Pacific Missile Range Facility, there are no one bedroom apartments that exist within 15 miles of the base. There are no townhomes within 40 miles of the base (i.e., you need to drive all the way to the other side of the island). When I arrived there in 2007, rent for a 3 bedroom homes was ~ $3000/mo, while BAH was $1850.__B) The company contracted to do this survey doesn’t actually survey every location. They do certain markets, and then use the Housing and Urban Development statistics to adjust things for other locations. Unfortunately, HUD often gets things wrong themselves, and they also do not actually survey every location.__C) There is no adjustment for the realities of the location. For instance, Naval Base Ventura County is in the district of the absolute worst high school in the entirety of Ventura County. Anyone with any ability to afford it moves at least 15 miles away to Camarillo, and many drive 1.5 hours from Thousand Oaks, Westlake Village, or even Agoura Hills. God forbid you live at Edwards AFB where one must drive 10 miles from the gate to your workcenter…