Investment Strategies for Military Members: The Truth About Cars, Debt, and Real Estate
The typical financial wisdom in the military is to invest your money into stocks, bonds, and mutual funds within Roth IRAs or your TSP and plan on compound interest to do the rest.
This plays into a common narrative that members of the military simply don't have the financial acumen to do anything more with our hard earned money. Let's break down a couple of the supposed truisms and then let's take a look at a completely new way to compound your investments for retirement.
The Truth About Cars, Debt, and Real Estate
True or False? #1: Compound interest is the only way to save enough for retirement on a government salary.
Let's imagine there is an investment opportunity that grows in value, or appreciates, but also provides you with extra cash every month to spend or put towards your next investment. Real estate investing - when focused on cash flow and the "buy and hold" strategy - is exactly that kind of investment.
All other factors aside, if you were to have enough investments or assets that collectively produce enough spending money for you every month, you could retire. It's a completely different way of looking at saving for retirement and might even take a little bit of convincing to get comfortable with such a concept. However, collecting assets is critical to building wealth.
Now let's spin the brain on its axis some more... Let's forget about how much money we have or what our net worth is and, instead, let's focus on compounding that monthly spending money (read: cash flow) by investing in more investment's that produce more... you guessed it... cash flow.
This future cash flow potential can be calculated with our new REI Cashflow Calculator.
True or False? #2: A TSP, IRA, or 401(k) is the only way to shelter savings from taxes.
Real estate investing is one of the best ways to save money on taxes. Especially when you combine primary residence interest deductions and depreciation on rental properties.
The magic really starts happening if/when you decide to sell your rental property and execute a 1031 Exchange. This seemingly magical process allows you to buy another real estate investment after selling one, not pay any capital gains tax on the sale, and simply defer those taxes for the next time you sell. The goal is to keep differing the taxes until you die. The taxes do not get passed down to your children. They simply disappear. Poof!
True or False #3: Retiring early is lazy. It's noble to work.
Retiring from the military or a later civilian job early doesn’t mean you are lazy. Personally, I don't think I could ever sit still. What we mean by retiring early is that our lifestyle and livelihood doesn't end or get hindered if we stop working or experiment with other projects or passions. This is especially important to understand for when we prepare to transition out of the military..
What does financial freedom at retirement look like? Here is a quote from Tony Robbins' book, Unshakeable:
"You need to be able to live on 4% of your wealth annually so it doesn’t diminish. Spend $80k a year? That’s $2,000,000 in the bank required."
I feel like there is a certain sense that working simply for the sake of working is noble way to spend your time. Obviously, in the military, we have a higher calling and we all agree that our work is really our service to our country. However, even members of the military often find themselves becoming busybodies and begin turning our service into a busy job.
In my opinion, there is nothing wrong with setting up your finances in such a way that that allows you to retire early. In fact, learning how to be successful financially can be the "noble thing to do."
True or False #4: Debt is bad.
Answer: True & False
Bad debt is bad, good debt is good. If you take on $100,000 of debt and have to pay 3% on that debt while making 10% as a direct result of investing that money, you are using your debt wisely and it is considered good debt. The secret sauce in this example is finding the performing investment, or asset.
Believe it or not, even buying a terrible financial liability such as a car can be done wisely. If you have made the lifestyle choice that you absolutely must have a new car every few years, then, instead of buying a car cash, find the most reliable car you can (I'm a big Honda fan because the first three years really only require oil changes) and lease it for as cheaply as possible. It's not your car, so you don't even have to worry about the expensive tire alignments or rotations they always try to sucker you into paying for when you get your oil changes.
By the way, I negotiated to get my oil changes done for free for the full three years of my lease. I got this because I knew Honda was doing a $500 discount on car purchases for veterans. Boom! Easy!
I've had friends take my advice and simply fight for a good deal by stating their needs and then staying at a dealership well past closing time. They ended up driving off the lot with a brand new Honda with $0 initial out of pocket cost (except DMV registration and title fees) with payments between $200-$250 a month. This gave them the opportunity them to save $10,000-$30,000 and have the option to put their money towards high cash flow real estate investments (NOT THE STOCK MARKET).
The trick is to trade low interest debt for high interest investments. In other words, buy high interest investments with money you are borrowing cheaply.
Consider yourself lucky to be living in America. I remember seeing advertisements in Ukraine for 25% interest loans!
True or False #5: Your Home CAN be an investment.
First of all, when you buy a house, don't speculate about the potential appreciation. Banking on the local market's appreciation to turn your house into an investment is risky business and can cause a lot of stress and heartache if the next market correction happens right after you close on your new nest egg.
Analyze the rental market thoroughly, and give yourself a very realistic estimate of your home's monthly rent. If you are conservative and build in a 5-10% buffer and STILL calculate that you will have money left over after all expenses, then you will have a solid future rental property down the road.
Next, depending on your lifestyle expectation and family situation, make a decision on whether or not house hacking is for you. House hacking is by far one of the easiest and most profitable ways to get your foot into the proverbial real estate investing door.
Anything from finding creative ways to force appreciation, renting out rooms to friends or family, installing solar panels, or AirBnb-ing your home while you are away are all excellent ways to minimize your housing expense and maximize your investment potential.
If you really want to go varsity, set your goals at acquiring a small multi-plex (up to 4 units) with your VA Loan and let the rent from the other units more than pay for the entire property's mortgage. Oh, and guess what, you can even negotiate a solid chunk of change for renovations with a good VA Loan lender!