Debt Pitfalls for Military Members

The military has some unique debt traps that are easy to fall into.

Buying New Cars

One is this whole military car sales thing.

“Let me go talk to my manager!”

You’ve seen them lurking around the BX preying on new enlistees just getting started out in life.

They try to sell you a new car when you are overseas.  They’ll tell you it’s an amazing deal because you are in the military.  They sometimes try to sell it as a military benefit.

It is simply not true. A military benefit is when the US government subsidizes the cost.

Here are examples of actual military benefits:

• Commissary
• BX
• Medical and dental care
• Space-A Travel
• Tax-free housing
• Montgomery GI bill

Here’s an example of what is not a military benefit:

• Military car sales (or some variation).

We are sometimes misled to believe it is a benefit.  The price of the car is NOT subsidized by the US Government.  They are car salesmen.  They make a commission.  They probably have a new car too.  How’d they pay for it?

Commissions from people just like you!

TURN AROUND AND RUN!

You might be getting a decent price on a new car, but it’s still a new car and it’s a horrible investment.  Actually, calling it an investment is just wrong.

Buying a new car will achieve the exact opposite of financial independence.

Here’s a fun fact courtesy of edmunds.com.

• A new car loses on average 11% of it’s value the second you leave the lot
• During the first 5 years the car depreciates 15%-25% each year
• After 5 years, the car is worth 37% of what you paid for it

What a deal!

That’s even better than buying stock in Enron!

I know, I know.  You deserve a new car!  Lots of people get new cars.  You just got promoted, your wife got a raise, it’s safer for the kids, the warranty pays for itself, or even “insert another weak excuse here”.

Go ahead. Get one if you want.  But you are making a choice about your future.

Do you want a new car, or do you want to retire early?

Do you want a new car, or would you rather never have to work again when you hit 20 years in the military (my plan).

My humble advice on buying a car.  Get a sensible Japanese model (Toyota, Honda), 4-5 years old, one owner, low-mileage.  Pay cash.

Don’t even think about getting a boat, timeshare, or a motorcycle.  I don’t have the time or patience to write about how bad those things are.

I’m awesome.  I deserve it!

Buying on Credit

This holiday season, our BX offered a special for Christmas shoppers: Six months of no interest and no payments.

Awesome.

It’s been a tight year.  Our savings are gone, and we’ve maxed out our credit cards.

     How will we get the great Christmas we deserve?

Easy.  Six months of no interest and no payments!

Our friends will see all those big presents under our tree and think we’re cool!

My kids will finally love me.

Again, BAD IDEA!

This encourages spending money you haven’t earned yet. I can’t think of a situation where this “special” makes sense.  If you don’t have the money saved up and set aside for Christmas, don’t borrow it.  Don’t put it on a credit card.

If you want to spend a little money at Christmas, budget for it and spend cash.

Apply this to any situation where credit is involved.

Last but not least…

Buying Houses

It seems to me most people have figured out how to retire from the military wealthy.

It’s simple.

Buy a house at every assignment in the states and make it a rental when you leave.

Instant millionaire.

How do you know you’re making money?  Easy.

Anything extra after paying the mortgage is pure profit.

Even if you lose a little money each month, you’ll make it up in appreciation and tax benefits!

I wish it were that easy.

You’ll need a management company.  Most suck.  Having a different management company for each house in each state is not going to work out very well.

Ever heard of the 50% rule?  You won’t like it.  Cover your ears.

Approximately 50% of rent will go to expenses.

I thought I was making tons of money!!

Nope.

So what kind of expenses eat up 50% of my rent!?

Property taxes, interest, insurance, repairs, capital improvements (big projects like roof, windows, A/C), vacancies, management fees, vandalism, etc.

That’s the expenses WITHOUT considering the mortgage.

In Washington D.C., it took two months’ rent just to cover my property taxes.  If you’ve got a big mortgage payment, how do you make that work?

If you are bringing home an extra $100 a month on top of your mortgage payment, you’re going to spend that and quite a bit more out of your own pocket to cover all these expenses.

It’s worth figuring out how much you actually are making (or not making).  Read a previous post of mine to see how I calculate this.

How much money will I make from my rental property?

You can buy rental real estate as a military member.  I’ve bought a lot.

But only when it makes sense financially.  It might not be every assignment.

Probably not Hawaii.  Sorry.

Only when the NUMBERS work!

Ok, my numbers don’t work, but I get that great tax benefit…

This is the most misunderstood part of homeownership.

I hear the tax benefit argument a lot, and it is misleading.  It helps a little, but not enough to offset purchasing a house that doesn’t rent for enough to make financial sense.

But you can write off  the mortgage interest…

That’s sort of like saying I’m spending $2000 to save $560.  Don’t try this investment strategy for too long.

First problem with the mortgage interest tax deduction:  On your primary residence, 50% of taxpayers get zero benefit from this.  If you take the standard deduction instead of itemizing deductions, this tax break means nothing to you.  No money saved.

Second problem:  Homeowners often think they are getting a tax credit.  That means $2000 spent on mortgage interest means $2000 saved on taxes.

Um, I don’t think so.

If you spend $2000 on mortgage interest, your taxable income is reduced by that amount, meaning your savings would depend on your tax rate.  If you are in the 28% tax bracket, you would save $560.

So when people tell you even though they are losing money on a rental property, they still get the tax break, what they are actually saying is they are spending $2000 in interest to save $560.

Does that seem like a good strategy?

But I can depreciate the property…

This helps a little with current year taxes.  When you sell down the road, however, depreciation gets recaptured (fancy word) and Uncle Sam will get his cut.  Recaptured essentially means you pay taxes on the money that was depreciated (subtracted from taxable income) in the past.

This means depreciation does not eliminate income tax, it defers it into the future.  Also, only the building is depreciable, not the land.

Do I seem a little sarcastic and preachy when I talk about this.  So sorry.

I’m allowed to, because I did the EXACT SAME THING and know that it cost me a lot of money.

In more cases than you realize, you are better off not purchasing a home, not having a loan, renting instead, and saving yourself the interest and expenses.

What about buying a brand new house?  Might be a good investment…

O my god!

Not going to go there.

In Summary

If you enjoying working full-time, and plan on doing so until well past social security age, you can have all these things I’m telling you not to get.

Get the big house, new car, boat, Harley, timeshare, and use credit.  As long as you keep working at higher and higher paying jobs, you just might keep your head above all that debt.  But you can’t stop working and maintain that lifestyle.

But if you can imagine a different kind of life.

A life where having money in the bank is more important than having a big house or new car.

A life where you stop working for the man early in life, and do what you want with your time.

Travel the world, work part-time on things you actually care about, spend lots of time with family and friends (if you want).  Move to Hawaii and take up surfing full-time (my current plan, don’t tell my wife).

It’s up to you.

Now your money situation is straightened out. Read about how I bought 2o single family homes as buy and hold rentals in my spare time.

The Complete Guide to Real Estate Investing

Rich on Money