Financial Tips for Soldiers

Part III

                In my first article I highly emphasized the need for a 10% investing plan and a 10% emergency fund.  I stated that you should use direct depositing to feed your 2 saving plans.  I also admitted that I wished soldiers used direct depositing, so it would take money out of your hands.  In my second article I promoted the message to use index funds with your two savings plans.  I advocated stock indexes such as the Wilshire 5000 or S&P 500 for your 10% investing plan.  I also promoted using one of Barclay’s short or midrange indexes for your emergency fund.  Now I will present another financial opportunity for soldiers once their 10% investment plan grows large.  BUY RENTAL PROPERTIES!  Income real estate may sound like a “pie in the sky dream” to some people, but I believe it’s a good long range goal for my intended target audience.  Look at investing 10% of your income in index funds as a short or midrange strategy and rental property as your long range goal.  Allow me to support my advice.


Income Real Estate:

Income real estate involves buying properties with the intention of renting it out to tenants.  Duplexes and multi-dwelling apartments are ideal for rental income purposes.  The main concept behind income real estate is to purchase a property that generates more rental income than it costs to purchase and maintain it.  In other words, YOU (as the landlord) receive enough rental income to pay off all expenses and still make a profit.  For example, let’s say you own a duplex that generates $1,600 in rental income on a monthly basis.  Let’s say your mortgage, insurance, taxes and other expenses total $800 monthly.  That means you will earn $800 in positive cash flow, and that’s an outstanding return.  Yes, you will have to keep the property rented, ensure you receive your $1,600 in rental income and keep your property’s expenses at $800 monthly.  Yes, you have to perform regular maintenance, badger tenants for the rent, and you may have to go to small claims court to evict a deadbeat once in a blue moon.  With all of this being said, income real estate is an outstanding opportunity!  Let me list the reasons why:


Real estate creates a forced savings plan.  

If you do your homework and purchase the right property you can pass the mortgage payments, taxes, insurance payments and all of the maintenance expenses off on your tenants and still make a nice profit.

Real estate hasbuilt in inflation protection.  Landlords usually have no problem on passing off any inflation to their tenants.  

Over the years your property will build “equity.”  To those who don’t know what equity means, it’s the amount of the loan you have paid off.  For example, if you have paid off half of a $200,000 mortgage you have $100,000 in equity.  Banks will allow you to use this figure as a down payment against future loans.  It’s almost like having $100,000 in cash.  You can use this money against future loans.

Real estate offers excellent tax reducing strategies that are better than many other types of investments.
There are never any guarantees in life, but if you are a “buy and hold” investor, you will experience a nice profit when you sell your property (Also known as a capital gain.)  In most cases, if you buy and maintain income real estate for 1 or 2 decades you will earn a good return.  This capital gain combined with past rental income tends to make real estate very lucrative. 

If you personally work hard to improve the appearance of your property, which is known as building “sweat equity, it will improve your chances of earning more in rental income.  It will also offer you more money when you sell your property.
Soldiers are good with their hands, and they tend to have higher energy levels than the average person which is very conducive for earning sweat equity.

Over time inflation will increase the amount you can charge for rent while fixed mortgage payments remain constant.  If you add in some improvements using sweat equity your profit margins will steadily increase. 
Once your property is completely paid off your profits will boom!  A paid off rental property is a goose that lays golden eggs.  You should never sell such a valuable piece of wealth.  Never consume a goose that lays golden eggs merely for a nice diner.

When you are young you have an abundance of time and energy.  It’s an ideal situation to create sweat equity, and once again, soldiers tend to have high energy levels.

By working on your real estate you will form valuable skills you can use throughout your life.  Construction skills, electrical skills, plumbing skills, masonry skills and mechanical skills are just a few examples.

For whatever reason real estate tends to lure in cheap labor.  On many occasions my friends have freely volunteered to help me with projects without any solicitation.  Usually I feel indebted to them, so I offer them free beer and a good meal.  To be completely honest with you, these work parties can be memorable events that you will cherish.  Everyone tends to walk away happy at these work parties.

You don’t need an extensive financial education to excel in real estate.

You don’t need “inside market information” to be exceptionally successful in real estate.

In many cases, two good duplexes that are paid off will generate more rental income than what a First Sergeant will earn from his or her military retirement.  Personally, I believe it’s substantially easier to achieve the wealth that I’m describing than earning the rank of First Sergeant.  Furthermore, if a person is committed enough to reach the rank of First Sergeant they have more than enough drive or discipline to purchase 2 duplexes.  With this in mind, it would be wise for retired soldiers to double, triple or quadruple their retirement with income real estate.  Since what I’m trying to promote has more to do with discipline rather than higher education, and soldiers tend to have huge amounts of discipline, it’s a “no brainer.”


Real Estate tends to be a long term investment, it creates forced savings, it offers tax savings and it generates steady streams of rental income.  For these reasons and many more real estate is ideal for the young inexperienced investor.  To be honest with you, I think income real estate is a young person’s game, but there is one major drawback for soldiers.  You may need some support from your extended family to maintain your properties.  With all of the traveling and deployments soldiers face it’s difficult to own and maintain income property, but it can be done if you have the support of your family.  If you lack the family support I’m describing work harder to build your 10% investment plan.  When you retire from the military you will have generated enough savings to purchase a hand full of rental properties when the time is right for you. 


How to get started in real estate:

-          First you need to purchase a good business calculator that calculates mortgage payments. 

-          You need to learn how to calculate a mortgage payment.

-          You need to know the interest rates for 10, 20 and 30 year mortgages.

-          You need to know what insurance companies tend to charge for coverage on a typical duplex in your area.

-          You need to know what duplexes tend to sell for in the area that interests you.

-          You need to know the property taxes that are associated with any property that interests you.

-          You need to have a realistic understanding about what you can charge for rent. 

-          Most importantly, you need enough money to cover the down payment and various closing costs.  This explains why you need to set aside 10% of your income religiously.

Calculating a mortgage payment:

                Go out and purchase a good business calculator, and take the time to learn how to calculate a mortgage payment.  This may sound difficult but it’s not.  You only need to learn how to use 5 keys that are associated with the following information: Present value (PV), future value (FV), interest rate (I), maturity (M), and the payment key (PMT).  Unless you want to determine your future rate of return, you don’t even need to know how to use the FV key while calculating a mortgage payment, but you would be wise to learn this valuable process.  If you are willing to listen to me this far, take the time to learn about the future value key and understand what it means.


                The next step is as simple as entering the right information into the right key.  Enter the property’s asking price in the (PV) key.  Place your bank’s interest rate in the (I) key.  Enter the length of the loan into the maturity (M) key (*Note:  You may have to enter the months involved rather than the years depending on your calculator).  Then you simply hit the payment key (PMT), and you have your mortgage payment figure.  Once again, it’s really simple once you have learned the process of your calculator.  Typically I can calculate a mortgage payment within 30 seconds.  Keep in mind that the calculator does all the math.


Calculating the other expenses:

                   Once you calculate your monthly mortgage payments add it to your other monthly expenses.  Add your monthly taxes, insurance, projected maintenance and mortgage payments together.  As a young soldier you will most likely need to add in Private Mortgage Insurance (PMI) as well.  PMI is an insurance that will ensure you will pay off your mortgage as agreed upon.  It protects your bank in the case of default.  (See the example provided below to broaden your understanding about what I’m trying to communicate.)


Mortgage Payment:                                       $410

Monthly Property Taxes:                              $200

Monthly Property Insurance:                     $100

Monthly Projected Maintenance:            $  50

Monthly PMI:                                                    $  40


Total Monthly Expenses:                              $800


*Note:  Speak with your realtor to get the exact tax figures.  Your realtor can also give you ball park figures for maintenance, property insurance and PMI expenses.  For more accurate expense figures speak with an insurance company and your banker. 


Projecting Rental Income:

                Before you purchase a duplex or multi-home dwelling you should have a good understanding about the market’s prevailing rental rates.  You should know what a 2-bedroom or 3-bedroom rental goes for in the neighborhood that you are looking at.  You can build your knowledge by reading newspaper ads, looking at many properties and asking your realtor for estimates.  The more research you perform and the more properties you look at, the better you will become at projecting future rental income.


Projecting Positive Cash Flow:

                Once you have a good idea about monthly rental income simply subtract the total monthly expenses, and you will have your monthly cash flow figure.  See the example below:


Monthly Rental Income:                               $1,600

Monthly Property Expenses:                      $   800


Monthly Positive Cash Flow:                       $   800  


                As you can see none of the math, calculations or projections that are involved are overly difficult in nature.  You don’t need a bachelor’s degree in finance or economics to purchase income real estate.  I know what I’m speaking about because I have these two credentials.  Most of what I’m describing is very basic.  The only thing I’m promoting that is actually difficult about real estate is building up enough savings to cover a down payment and closing costs.  That is why I have strongly advocated a 10% savings and emergency fund.  It’s also why I will eventually explain the fundamentals of budgeting in my upcoming articles.

Down Payment:

                As a veteran you have an advantage that many envy.  You have access to VA loans.  Historically benefits such as these tend to reduce your down payment, and it offers you better interest rates.  During my day the VA offered a “nothing down benefit.”  If you were VA approved you could purchase a duplex with nothing down as long as you had good credit, and you could cover the closing costs.  I hear this might not be the case today, but it’s still a good opportunity for many young soldiers to capitalize upon.  There’s no question that VA loans are more beneficial for most investors than other forms of financing.  I have also heard that you can purchase a property with a VA loan, and still be eligible for a First Time Home Buyer’s Loan (FHA) in certain circumstances.  In both cases, this is very beneficial for soldiers.  Both VA and FHA loans require lower down payments and offers lower interests which paves the way for soldiers who want to purchase income properties.  This is one of many reasons why I believe soldiers should look at income real estate as an opportunity.  The higher powers that prevail are offering soldiers an easier path, so take advantage of this opportunity!

Closing Costs:

                Closing costs can be very costly.  Prepaid percentage points, land surveys, abstract updates and legal fees are some of the closing costs buyers and sellers face.  As a young first time buyer you want to avoid as much of these expenses as possible.  To achieve this objective you need to find a “motivated seller.”  Motivated sellers are property owners who are eager to sell their home as quickly as possible.  People such as these will gladly cover closing costs if they like the purchase price you offer them on their property.  In many cases, the key to a good deal is to offer the seller more than what he or she expects, but ask them to cover the closing costs.  In most cases, the seller will find a way to “bridge,” or take a short term loan to cross these expenses if the price is right.  In other words, you should be looking for a motivated seller who will cover the large majority of the closing that are involved.  Don’t allow anyone including your realtor to fool you.  In most cases the seller is more than willing to cover these expenses as long as they clear what they want as a profit.  In several cases, I have personally closed deals in regards to a property’s asking price, and then I turned around and offered the seller more money if they would cover the closing costs.  For example, initially I agree to purchase a duplex at $150,000.  Then I offered to pay $165,000 for their property if they cover all of the closing costs which totals $15,000.  In most cases, especially when dealing with a motivated seller, they will tell you that it’s no problem.  They will gladly cover the closing costs.  What I’m describing is more of a hassle to the seller than a deal breaker.  In the end the seller gets exactly what he or she wants and so do you.

     Where should you buy or what property should you own?

                The answer to this question is twofold.  First, buy properties based on “location, location, location.”  Buy into the best neighborhoods.  Second, buy the absolutely worst properties in the best neighborhoods.  Keep in mind that no one wants to live in a mansion if it’s deeply seated in a ghetto.  Therefore, buy a property that’s sorely ran down and underpriced in a good neighborhood.  You can restore a beat down property back to prominence, and then you can charge top dollar for rent if it’s in the right area.  This is what I mean when I speak about sweat equity.




What you should focus on:

Never speculate and buy raw land.  Raw land doesn’t offer you immediate positive cash flow.

Always buy properties that offer you positive cash flow from the very first day you close the sale.

I believe one side of a duplex should cover all of the expenses that are involved while the other side should offer you positive cash flow.  

Buy the worst rental properties in the best neighborhoods.

Buy properties with 3 bedroom apartments.  Properties such as these attract working families.  These types of properties will attract the demographics you want to rent to. 

Avoid professional contractors.  Make your own improvements and build sweat equity.

Purchase properties with the least down payment and closing costs as possible.  In my day I tried to buy properties with no closing costs or down payments.  Today the times have changed.  Most likely you will have to front money, but you should put down the least amount of cash that is possible.

Since you are a soldier seek out VA and FHA loans.  You can purchase duplexes or other income properties with these types of loans.  The VA requires lower down payments, and they offer better interest rates.  Keep in mind that you may be eligible for a FHA loan even if you have received a VA loan.

Learn how to calculate a mortgage payment, add up expenses, project rental income and determine future cash flow.
Before you rent out your property to future tenants be sure you have a good rental contract that protects your best interests.  One of the most important parts of a rental contract is to have a daily late fee when rent is not paid promptly.  This will offer you leverage and offset eviction expenses if you encounter someone who refuses to pay their rent.

I want to emphasis this point, I believe when all of the expenses are tallied, the rental income from one side of a property should cover it all.  Worded differently, one side of a duplex should cover the mortgage, taxes, insurance, PMI, and other expenses.  Therefore, you should be able to live on the other side free of any expenses, or you should be able to rent it out for positive cash flow.  If you can’t achieve this objective, it’s not a good deal.  Hold out longer.  Search the market, and find a motivated seller.  Trust me, you can easily find such opportunities if you remain focus, persistent and patient.  


The concept of wealth:

                Most people can’t achieve financial freedom because they don’t know the difference between money and wealth.  Many ignorant people proclaim “Cash is king” when in reality “wealth rules supreme.”  Money by itself doesn’t multiple or build further piles of cash on its own.  Money is only a median of exchange between buyers and sellers.  On the other hand, wealth creates steady streams of income.  Wealth constantly multiples and forms larger piles of cash.  Sure, stocks may provide dividends and bonds provide interest, but a good piece of real estate will consistently provide steady cash flow with little or no volatility.  The only thing that may trump real estate in terms of cash flow is a good business or corporation, but this goes well beyond my message that is targeted at the average soldier.  Since 1 out of every 10 businesses fail in the first year, and half the ones that survive will fail in the first 5 years, it’s clear you have to be very business savvy to start your own business.  Since my message is not intended for the business savvy, I would suggest soldiers should start out by saving in index funds and progress into rental properties.  Perhaps the next step may be starting your own business, but don’t get ahead of yourself.  Initially you need to begin saving money and investing it wisely.  Next you need to purchase wealth such as income real estate.  This concept is similar to the fable of the goose that lays golden eggs, and this is what you should want to achieve.  You want to own a “goose” that produces steady streams of income or golden eggs.  In most cases, rental properties are “the goose that lays golden eggs.”  Rental income combined with your military retirement is the path to financial independence if you are disciplined enough to live within your means.




                The first step towards financial independence is to save 20% of your income.  10% is dedicated to investing, and the other 10% is an emergency fund.  The second step towards financial security is to invest in index funds.  Yes, some investors may find this message too simple or boring, but this is shred advice for the average soldier.  Finally, you need to rollover your savings and index funds into wealth by purchasing rental properties.  You eventually want to own properties that offer you steady streams of positive cash flow.  You want a goose that lays golden eggs.  In most cases, you want to accumulate enough wealth to offset the luxury items that most people want to buy in the future.  Keep in mind that foolish people buy luxury items up front then the struggle helplessly to pay it off.  On the other hand, the wise person buys their wealth first, and then they use the positive cash flow their wealth generates to cover the luxuries they desire.  Therefore, live within your means, build wealth and then when you’re well off, reward yourself with the luxury items you desire.  Doesn’t this make complete sense?


                Keep all of the advice I have provided in mind, and read books on the subjects I have discussed.  The author Robert Allen is perhaps the best source of information on real estate.  Before you fully accept anything I have discussed read what Mr. Allen has to say on this subject.  Do your homework and gather all of the facts before acting.

For reference here are links to my prior posts on Financial Tips for soldiers:

-          Part I

-          Part II

-          Part III 

-          Part IV

-          Part V




William G. McKinney

Bradley’s Military Enterprises