Financial Advice Q&A

Occasional Visitor
Tryin to do it right
Posts: 2
Question
Should I buy a rental property?
[ Edited ]

Hello. I'm a 30 year old active duty member whose has been in for 6 years and that would like your financial assistance. I just recently got married and want to make sure that I’m headed down or maintain being on the right track. I have roughly $28K in savings/money market, $181.5K in personal investments, $134K in traditional/Roth TSP, $53K in Roth IRA, and $19K in an annuity. My current duty station is not ideal to buy a home and may do that at my next stateside PCS. However, we have been offered a house for sale from her parents’ neighbor that has been almost exclusively rented out by military/DoD employees. The current owner is selling the property for no particular reason other than he is retiring to a different location of the country and can’t be in the local area. The sale would be $100K and projected to have $12K in renovations. The annual rental income from this property will be $22-25K/yr. The average length of stay of those renting that house has been 2-4 years in the past and has no issues finding renters since it is literally down the street from a military base which makes the house location attractive. Having military/DoD employees as tenants is preferred since I can locate them easy for any issues. My question to you: Is this a smart/wise financial move? What are your thoughts if paid the house sale cost from what I accumulated my personal investments of $181.5K? A good chunk of it, ~$55-60K, is the "houses money" since it is what I made in profit from early 2009 and so I would own the house our-right with no debt. Is this a good investment move for me? Should I borrow a loan from the bank to help with the purchase (maybe $50K)? If I get $23.5K/yr (average of $22-25K) from the rent I can recoup my $112K initial investment in 4.7 years and my wife and her family stated that the house has never been empty for more than 1 month. Is this a good/bad return on investment? My average take home pay is about $5.4K (this does not include the contributions to my TSP) and have an average monthly expenditures including rent, utilities, insurance, and other living expenses has been anywhere from $2K - 3K/month. This includes my wife and my expenditures. My wife doesn’t work right now and so my annual household salary is roughly $100K. Also, I always pay the credit card bills in full and on time. I have no debt. I normally max out my Roth IRA at $5K and TSP around $16.5K. Currently, my monthly TSP deduction is at $1.3K/month with the last couple of maxing of supplementing to max out. I believe this to be everything but I'm would like to know if I'm missing something that I should be doing. My long term goal is to retire very comfortably but now that I'm recently married I would like to think about my immediate future. Any assistance would be greatly appreciated.

Other Answers: 1
Community Manager
JosephMontanaro
Posts: 62

Wow! Congratulations on your recent marriage and hats off to you for your excellent work on the financial front. Let's see--you've got a robust emergency fund, your savings rate is outstanding, you're investing in a tax diversified (traditional, Roth, taxable investments) portfolio.  You are doing a great job on the financial front! Maybe we should be asking you for advice! One thing is for certain, you should continue these excellent financial habits and make sure they remain a family affair. 

 

I do have a couple of comments and thoughts on the questions you've posed.

 

Are you missing anything? I don't know. Like I said, you appear to be doing a lot of things right. As you're recently married you'll want to make sure this is reflected in your finances. This means bringing her on board with what you are doing, establishing a routine for how you both manage your day-to-day finances (and talk about them), updating beneficiaries (TSP, SGLI), modifying estate planning documents (wills, powers of attorney, etc.).  

 

Real estate? I typically don't get too excited about active duty folks buying real estate...unless they intend on owning the property for an extended period of time. In this case, you are looking at it as a long term investment, so that's a good thing. Given the information you've provided it seems like a solid investment. You'll have to have a plan to manage the property after you PCS, but having your in-laws right there should be a good thing. You'll also want to keep or expand your emergency fund to account for any maintenance or vacancy issues and get a firm understanding of what you need to track for accounting/tax purposes up front (do your own research or talk with a CPA). One of the advantages of real estate is that you can control significant asset value with limited resources (leverage). While that can be a good thing, I would consider using part of your personal investments to make a big down payment (say 50%) for your first venture into rental real estate. I've never owned a rental, but I've had friends, family and clients that have and their experience has been a mixed bag --not overwhelmingly positive or negative, but certainly a study in humanity.

 

Again congratulations and keep up the good work!

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