Start Your Retirement Back-Up Plan with Real Estate
Photo via American Advisors Group
Think outside the moment with me. When you look toward the future, what’s your end goal? Look beyond your next potential duty station. When you say goodbye to your military career and envision life on the other side, what do you see? You might see a gourmet kitchen glistening with the latest technology or flights across the world to scratch that travel itch you’ve had all your life. Maybe it looks like the freedom to visit your grown kids at the drop of a hat. Whatever image you hold in your mind, it’s important to you.
Are you working toward it?
It’s challenging, especially with finances, to look ahead. The demands of everyday life feel overwhelming at times, and the thought of getting ahead can feel unrealistic.
You’re not alone! To get a grasp on the subject, we’ll get into the statistics of the average American planning for retirement, talk about what it looks like for military families, as our journey is unique, and, of course, talk about ways to work towards your goals.
Start Your Retirement Back-Up Plan with Real Estate
How much money do you have in your retirement account?
Take a look at what the Economic Policy Institute (EPI) says the mean retirement savings of all working-age families aged 32 to 61 years is: $95,776.
This number affects us all differently, but to put it further into perspective, it demonstrates how the average American worker doesn’t have nearly enough retirement savings. Just look at what the EPI reports.
Median balances for families with savings range from $1,000 for families in their mid-30s to $21,000 for families [who were] approaching retirement in 2016. — Economic Policy Institute
This lack of working toward retirement savings at an early age means that these people could quite possibly never see a retirement (or a comfortable one). Let’s pause for a minute to remind you that this isn’t to scare you. Sharing this information and talking about retirement and money is only to understand it better and make sure that we’re all aware of the consequences and where our goals fit into it. If we need to work harder, then, now’s the time, right?
Here’s a helpful timeline by Fidelity Investments. It’s good to help understand where you are and what needs to change.
- By age 30: Have the equivalent of your salary saved
- By age 40: Have three times your salary saved
- By age 50: Have six times your salary saved
- By age 60: Have eight times your salary saved
- By age 67: Have ten times your salary saved
While saving for your retirement comes in many forms, 401Ks, private investment accounts, and your Thrift Savings Plan (it’s a good idea to max out your investment at the full 5%), there’s more that you can do to work toward those sweet years on the horizon—real estate investing.
Investing in Real Estate as a Military Member
Because of our frequent duty station changes, military members are in a unique position to add a real estate income to their retirement portfolios.
Real estate investments meet one of our essential needs, a home for the family. And since it’s money you’d spend to live at your new duty station anyway, it makes sense to try to get double the benefit by turning it into a source of passive income to funnel money toward retirement upon moving.
For this to work, you’d have to consider the home you’ve just bought or are getting ready to buy as a long-term investment strategy. How do you do this? First of all, set emotions aside. If it’s not your forever home and you know the purpose is to turn a profit as soon as you PCS, look at what a prime real estate investment property looks like in your area.
It probably doesn’t have the in-ground pool in the back that you want or even all the finishes that make you swoon. Instead, it’s likely a three or more bedroom home in the form of a blank slate where family after family can envision calling it home. Oh, and move-in ready!
“The last thing you want, especially as a long-distance landlord, is a property with a laundry list of expensive repairs. Of course, you may want to invest in minor repairs like paint and new flooring. However, homes with a newer HVAC system and roof should be toward the higher end of your list even if their kitchens and bathrooms don’t reflect the latest trend.” — Is a Rental Property the Right Investment for You?
As you’re househunting for a promising home in the area, think about your target market. If you’re near a military installation, then it’s probably military families! So focus on proximity to the base while keeping local BAH rates in mind.
Then run your finances. While you may easily find a home within BAH limits that’s marketable to many, your goal is to bring in extra money each month, right? So your budgeting starts now. Look at your mortgage rates, homeowner/landlord insurance, emergency funds, property management fees (or alternative), and cleaning fees. Then, figure out how much rent needs to be to not only break even but end in the green each month. Are you within BAH rate now?
Long-term, you can look beyond the property’s rental potential. Ultimately, what’s your end goal? Because, when it’s paid in full, you can either:
- Sell the home and transfer the amount into a retirement savings account, such as an annuity.
- Keep it and continue to receive a monthly rental income as a cash flow supplement.
- Or, maybe you take the sale and chase after your next investment property.
The best piece of advice? Consult a tax advisor before making one of these choices so you can understand your responsibilities such as capital gains taxes.
The VA Home Loan
As a service member, you have the phenomenal benefit in the form of a VA Loan. This home financing option, if you’re not familiar with it, is a loan that offers a zero down payment opportunity to buy a home. If you’re PCSing, as many of us are, buying a home with a VA loan often has far fewer upfront out-of-pocket expenses than moving into a rental property. Rentals most often require a security deposit, first month’s rent, and sometimes even last month’s rent, in addition to pet fees, and so forth.
A VA loan won’t require the first payment until the following month. Don’t let the low upfront costs fool you, however. Houses require significant expenses that a renter wouldn’t have to shoulder, such as replacing appliances, annual HVAC system maintenance, and termite inspections.
Read What is a VA Loan?
Additional Home Financing Options
What if you don’t want to buy a home with a VA loan? There are a few instances where the VA loan isn’t a good fit, and you might find yourself shopping for other financing alternatives. For instance:
- You’re already using your VA loan benefit (though in special circumstances, you can take out a second VA loan).
- The home doesn’t meet the minimum purchasing requirement for the VA loan entitlement.
- You’re not too keen on adding the VA funding fee to your closing costs, meaning that you’ll walk into your new home owing more than the home is worth. It’s akin to the same yucky feeling that the financially squeamish among us feel after driving a brand new car off the lot and realizing that the 100 feet you’ve driven just cost about 5% of the value of purchase!
- You’re trying to buy a condominium in an area that the VA has tagged as a bad investment for such properties.
- The market in which you’re buying is too competitive to try and work a deal with a VA loan.
Down Payment Assistance
If you’re a fan of the VA loan but the cards aren’t playing out favorably, don’t let it hinder your passion to start investing in real estate today. Though it may not look exactly how you pictured it, not only are there other types of financing options that might be worth looking into like conventional loans, USDA loans, FHA loans, and more, there are also programs to help take the edge off your investment.
What are these programs? They’re essentially grants to help people buy a house.
“Down payment assistance programs are typically meant for first-time home buyers. However, a repeat homebuyer often counts as a ‘first-time buyer’ if they haven’t owned a home in the past three years. Other requirements might include income caps and buying a home in a qualified area.” — Peter Warden, The Mortgage Reports
Many states offer down payment assistance programs for which a large number of military families would qualify.
Most often, the eligibility criteria follow this general guideline:
- First-time homebuyers
- Must have a low to moderate-income
- The property is the buyer’s primary residence
- The home is in a targeted census area
- The program accompanies an approved mortgage.
But that’s not always the case.
Forbes says that “depending on the program, your income may need to be less than 80% of the local median income. Some programs have more liberal standards of 120% or more of local median income.”
This means that not all down payment assistance programs target low-income families; instead, they’re for those earning steady, moderate incomes, making them perfect options for military families.
How much can you save?
Down payment assistance isn’t limitless. You might be able to get only 5% of the home price through an assistance program or just a set dollar amount. To give you an idea, the Urban Institute survey shares what these programs look like based on area.
In New York-Newark-Jersey City, NY-NJ-PA, MSA, 28 percent of loans are eligible for at least one DPA program, and on average, borrowers are eligible for 3.7 programs. These borrowers qualify for an average assistance of $13,546. But in Dallas-Fort Worth- Arlington, TX, the average assistance amount is in the low $2,000s. This fluctuation is expected as the cost of living varies all over the country.
Where can you find down payment assistance programs?
While some down payment assistance programs are available through individual lenders, such as Wells Fargo’s CityLIFT, NeighborhoodLIFT, and HomeLIFT programs and government lenders like Fannie Mae, most of these programs are funded and distributed by each state and their housing commission.
So, if you’re interested in buying a home with the help of a down payment assistance program, check with your state’s government. A good local real estate professional should also be able to guide you, too!
Another type of assistance offered just for veterans and the active-duty military is The PenFed Foundation’s Dream Makers Program:
Dream Makers provides matching grants for a down payment and closing cost assistance. A 2-to-1 match of the borrower’s contribution to their mortgage in earnest deposit and cash brought at closing determines the amount of the grant -- the maximum amount being $5,000. The borrower must contribute a minimum of $500. You must be active duty, reserve, national guard, or a veteran, a first-time home buyer or have not owned a home for the last three years, or you have lost your home through divorce or disaster. Your gross annual income of all applicants used to qualify for a mortgage is no more than 80% of area median income, adjusted for household size. And you’re required to have a mortgage pre-qualification or pre-approval letter from any lender.
You’re probably beginning to realize that there are some undeniable benefits to homeownership when it comes to beefing up retirement savings. And if you’re ready to get started, MilitaryByOwner is here to offer resources to help when you’re ready to buy your real estate investment property. And we’ll still be here when you’re ready to lease it out and become a landlord.
Check out the resources we offer for your home buying or landlord journey! Whether it’s answers to questions relating to the home buying process, becoming a landlord, preparing for renters, and more, we’re here to help!
Learn more about investing in real estate as a military member at Active Duty: Passive Income.
By Danielle Keech
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