3 Secrets to Get Rich in the Military

by Rich

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BLUF: I made a lot of money while I was in the military, gaining millionaire status well before my recent retirement at 20 years in.

I’m visiting a friend in Hawaii right now. We have a lot in common.

He retired from the Navy 20 years ago.

I retired from the Air Force 5 months ago.

Like me, he retired financially independent and never worked again.

He spends his days surfing, hanging out with friends, and traveling.

What we did, anyone can do while they’re in the military.

We both had enough money saved up to never work again.

I’ll show you the exact steps we used to get rich in the military.

Getting rich in the military requires a different strategy than the average civilian. There are unique challenges we face for both how to invest and how to buy real estate.

Getting rich in the military can be boiled down to doing three things correctly:

Saving Money while in the Military
Investing while in the Military
Real Estate while in the Military

I’ll talk through the specifics of each step then reveal at the end which one is by far the most important.

Let’s dig into this.

1. Saving Money while In the Military

The secret to saving money in the military is to grow the gap.

What the hell does that mean?

Growing the gap simply means expanding the distance between how much you spend and how much you earn.

How Much Money Will I Make From My Rental Property?

by Rich

Most people grossly overestimate the cash flow they are actually getting on their rental property.

At the same time, the people trying to sell you investment properties also have a habit of fudging the numbers on cash flow and return on investment.

I’m here to make sure you can spot these inflated numbers a mile away.

The mistake most people make is believing that your money left over after paying a mortgage each month is your cash flow.

Wrong.

You need to subtract your mortgage from rent, then subtract all other expenses to arrive at your actual cash flow.

In many people’s case, this is a negative number.

That means you are not cash flowing, you are paying money out of pocket to own this investment.

Make sure this doesn’t happen to you.

It is helpful to understand two simple concepts for this all to make sense.

Those two things are the 1% rule and 50 % rule, which are easy to do in your head, and can save you the trouble of breaking out the calculator for rental properties that clearly won’t make money.

1% Rule

The 1% rule is quick and easy. Monthly rent should be at least 1% of the acquisition price. The acquisition price may be a higher number than the purchase price. It is purchase price plus the money to get the house ready to rent.

Example.

$80,000 to purchase house plus

$20,000 remodeling equals

$100,000 acquisition cost.

$100,000 home should rent out for at least $1,000 a month, or it would not be a good investment.

What is the logic behind the 1% rule?

If a house will give you 1% of the purchase price each month in rent, then it gives you 12% of the purchase price each year. That apparently means the investment makes 12% a year!!!!

WOW, THAT’S AWESOME! I’M RICH (ON MONEY!!)

Ready to Invest in Real Estate?

by Rich

Do you think you are ready to invest in real estate?

Many people want to invest in real estate before they should.

People see the success of others in real estate, and want that for themselves.

But it is as simple as it looks?

You are not ready to invest in real estate until you have:

your debt under control

regular contributions to retirement accounts

the right knowledge about where you will invest

the correct type of mentor

Why do we want to invest before we should?

Simple.

We have FOMO.

Fear of missing out.

We are under barrage from podcasts, books, lame blogs (like this one), and for some of us old people that can remember, Carleton Sheets infomercials.

Real estate investing is made to look easy.

3 Simple Strategies to get Rich with TSP

by Rich

Getting rich with a TSP is not as hard as you would think. One of the big problems with the TSP is how confusing it is. It has different funds than a 401k or IRA. But that shouldn’t confuse you. It is easy to follow these three simple (but not always easy) steps to ensure … Read more

HELOC to Pay off Mortgage – The Dangers

by Rich

Using a HELOC to pay off a mortgage is an interesting debate.

What’s a HELOC?

A HELOC is a home equity line of credit. If you have equity in your home, you can take out a loan from your bank using that equity as collateral.

Paying off a mortgage with a HELOC is paying off a loan with another loan.

While I’m not so sure paying off a mortgage is the smartest financial move anymore (I used to believe it was), doing it using another loan certainly an idea worth exploring.

I’m going to summarize the issues in a ~~fair and balanced~~ slightly biased way.

So Should I?

My final answer on this is that you should not use a HELOC to pay off a mortgage. HELOCs are variable rate loans instead of fixed rate like a (good) mortgage. HELOC interest is not tax-deductible in most cases. The line of credit can be frozen or reduced by the bank at any time. Also, even if you are making lower, interest only payments on your HELOC, it eventually will revert to a principal plus interest payment that you may not be ready for.

Of course, there is always the debate of should you payoff a mortgage at all.

Pay off Mortgage with a HELOC – How it’s done

One of the main ways to pay off a mortgage with a HELOC is confusing to someone with as simple a mind as mine.

I will attempt to explain the basics.

Each month you use your entire paycheck and apply it towards the mortgage.

Then, you use a good credit card (hopefully with points) to handle most of your living expenses throughout the month. This buys you roughly 45 days of interest-free money.

You then use the HELOC at the credit card’s due date to pay it off, and use the same HELOC to make the minimum mortgage payment each months.

Next month, you repeat the same process with your whole paycheck.

Best Cities to Invest in Real Estate

by Rich

As a military member, the largest difficulty I had was finding the best places to invest in real estate. I moved every 1 to 3 years, so I didn’t have an obvious choice. Through a lot of trial and error, I figured out a system that has worked well for me. It goes against the conventional wisdom on picking the best markets for real estate investing. That’s why it works!

How to Find the Best Markets

The secret to finding the best places to invest, especially in this advanced real estate cycle, is two things. First, you must gain a strong knowledge of the market you are going to invest in. This means you or somebody you trust needs to be your boots on the ground in that location. This will allow you to buy the right house in the right neighborhood in any city you end up choosing. Second, prioritize cash flow over appreciation. Make sure the property you buy will cash flow well, and never sacrifice that for a hope that you will get a large amount of appreciation.

Finding the Best Cities to Invest – Common Advice

To understand the significance of the advice I’m giving, I want to share the advice every other website would give you if you googled “How to choose the best city for real estate investing.”

O yeah. I’ll also tell you why those websites are all wrong.

All the other websites will tell you the most important things to consider in choosing a real estate market to invest in are items such as these:

1. Population Growth

2. Job Growth

3. Housing Appreciation

4. Low Unemployment

5. Low Rental Vacancies

These blogs will sometimes teach you how to lookup these statistics showing you which websites to use so you can pick the best markets to invest in real estate.

Long Distance Real Estate Investing Secrets

by Rich

What do I know about long distance real estate investing?

As a military member:

I’ve moved every 1 to 3 years while investing in real estate

I currently have 20 paid-off single family homes

I’ve self-managed and used management companies

I bought 16 properties while living overseas

I read a blog post this morning that said investing long distance requires a slightly different approach than normal real estate investing.

It’s a different ball game altogether.

The secret to mastering long distance real estate investing is getting these 5 things right:

The Importance of Boots on the Ground

The Best Real Estate Agent for Long Distance Investing

Choosing a Property Manager from Long Distance

Choosing the Right Property from Long Distance

Managing Contractors from Long Distance

The Importance of Boots on the Ground

This is where I feel a lot of new investors make their first mistake.

They are neglecting the importance of having boots on the ground.

There have been good books written about long distance real estate investing and how easy it can be done using video, pictures, docusign, and aligning yourself with a great “team.”

This all sounds great, and might work for an experienced investor.

I can tell you from a practical standpoint, however, that nothing replaces the importance of having boots on the ground that you can trust in the location you are investing.

Whether it is a contractor trying to rip you off, tenant trashing a house, or just a need to respond quickly to an emergent situation at your property, there is nothing like having someone you trust that can tell you what is actually going on with your property.

TSP Loan – Should I Get One?

by Rich

It is possible to get a TSP Loan.

But should you?

Couldn’t we use it to buy real estate and make a fortune?
Couldn’t we invest in the next hot thing, like an IPO, or bitcoin?
What about gold!?!

These are some of the questions we are here to answer today. I’ve heard people suggest these very things.

I’m going to first explain how the program works, then explore how using it will impact your future retirement income (ouch).

If you want the BLUF (Bottom Line Up Front) and skip the TSP Loan intro, click this section , just tell me if I should get it or not!

THE TSP LOAN PROGRAM

I’ll be abbreviating the TSP loan program here, but here is the source link from tsp.gov.

The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government.

HOW IT WORKS

When you borrow the money, it comes out of your actual TSP account. It can be any amount between $1,000 and $50,000, not to exceed your contributions and earnings from those contributions. It does not include any agency contributions (blended retirement system or BRS) or earnings from agency contributions.

As you are repaying this loan, it is repaid with interest through payroll deductions back into your own TSP account. This means that this large amount of money will not be growing tax advantaged in your TSP account during the time period you have borrowed it. You lose the opportunity for that growth. More on this later.

Keep in mind, even though you are paying interest, it’s a low, low rate and you pay it back to yourself, so it’s not really a cost to you. The interest, however, is not tax-deductible.

LOAN ELIGIBILITY

To be eligible for a TSP loan, the following must apply:

Employed by uniformed services or federal government
In pay status
Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
Have at least $1,000 in your TSP account not counting agency contributions and earnings
Have not repaid a TSP loan of the same type within the past 60 days
Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
Not had a court order against your TSP account

8 Crucial Rules for a 1031 Exchange

by Rich

The 1031 exchange (26 U.S. Code 1031), otherwise known as a like-kind exchange, or Starker exchange, is one of the most important tools for a real estate investor. I’ve seen too many military members not aware of this rule.

I’ve actually talked with military members who have sold their investment properties and had no idea they could defer the capital gains through this exchange. I don’t want this to happen to anyone.

Let’s get clear on it!

CAPITAL GAINS

When you sell real estate, Uncle Sam wants it’s cut of your profits.

There are only two ways to avoid paying the profits, or capital gains, on a real estate sale.

One exception is for homeowners who have met certain requirements with their primary residence, namely you’ve lived in the property 2 of the last 5 years (2 of the last 15 for military).

The other exception is for real estate investors, which we are focusing on with the 1031 exchange.

1031 EXCHANGE

The 1031 exchange got its name from the section of the IRS tax code it comes from. This is the section that allows for a like-kind exchange that defers the tax liability of the sale into the next asset.

Keep in mind, the 1031 exchange, or “like-kind” exchange used to apply to items other than real estate. As of December 2017, a tax reform law that passed limits exchanges to only real estate.

You may also hear the exchange called a Starker Exchange named after T.J. Starker, who successfully sued the U.S. government in 1979.

Before that, the exchange of real estate actually had to be simultaneous. Now, you can typically have 180 days between the sale of the property and the purchase of the replacement property.

Thanks Mr. Starker!

8 CRUCIAL RULES

1) LIKE-KIND

First, we need to understand what type of real estate can be substituted for what.

How Military Can Avoid Capital Gains on Sale

by Rich

You may not have to pay tax on all or part of the gain from the sale of your main home. This is where you live most of the time. A main home can be a:

House
Houseboat (cool!)
Mobile home
Cooperative apartment
Condominium

Actually, everybody can get this break on capital gains on the sale of a home under certain circumstances, but military members get an additional benefit that makes it much easier to meet the requirements.

Unfortunately, many CPA and “tax professionals” are unaware of this military benefit.

WHAT IS THE CAPITAL GAINS TAX?

Cars, stocks, and bonds are capital assets. A home is also considered a capital asset because it is a significant piece of property. When you sell it for more than you paid, it’s called a capital gain.

When you sell a stock for more than you paid, you’ll need to report that to the IRS and pay taxes on the capital gain. Primary homes get excluded from this as long as it fits certain criteria called the ownership and use test.

OWNERSHIP AND USE TEST

To be eligible for excluding capital gains on your primary residence, you must be the ownership and use test, as outlined in Publication 3 – Armed Forces Tax Guide. You will be eligible for the exclusion if, during the 5-year period ending on the date of sale, you:

Owned the home for at least 2 years (the ownership test)
Lived in the home as your main home for at least 2 years (the use test)

If you don’t fully meet these two tests, you still may be eligible for a partial exclusion. See IRS Pub. 523 for more details, and consult a smart tax advisor.

This is commonly explained as you have lived in your primary residence 2 of the last 5 years.

HOW MUCH CAN YOU EXCLUDE?

It seems like it should be unlimited, right?

Dream on. The USGOV would never allow that!

You can exclude up to $250,000 of capital gains if filing single / $500,000 if filing jointly.

This exclusion is allowed each time you sell your main home, but generally not more than once every two years.

WHERE MEMBERS OF ARMED FORCES GET AN ADDITIONAL BENEFIT

Here’s the good part!