Military Crash Pads, Short Term Rentals, & Military Real Estate with Air Force Officer Paul | Military Money Manual Podcast Episode 56

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Spencer Reese from Military Money Manual and his co-host Jamie chat with their friend Paul, an Air Force officer and real estate investor.

Paul has built up a small real estate empire in his 12+ years in the Air Force. He focused on long term rentals when he PCSs and short term rentals near military training bases, also known as military crash pads.

Paul shares some of his tactics, techniques, , and tips for succesful real estate investing.

If you have a question you would like us to answer on the podcast or just need some extra guidance and help with your military money, please reach out on instagram.com/militarymoneymanual or email podcast@militarymoneymanual.com.

If you want to maximize your military paycheck, check out Spencer's 5 star rated book The Military Money Manual: A Practical Guide to Financial Freedom on Amazon at or at shop.militarymoneymanual.com.

I also offer a 100% free course on military travel credit cards and getting annual fee waived credit cards, like The Platinum Card® from American Express, the American Express® Gold Card, and the Chase Sapphire Reserve® Card in my Ultimate Military Credit Cards Course at militarymoneymanual.com/umc3.

Military Money Manual Podcast Episode 56 Links

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Military Money Manual Podcast Episode 56 Transcript

[00:00:00] Paul: When it comes to investing in rental properties, just like anything, do not go into it without any knowledge. Make sure that you are doing a lot of research. Yeah. May I've heard in, in, especially when you're investing with. With other assets, do your due diligence and make sure that you understand the process first.

[00:00:36] Spencer: Hello, podcast listeners. Welcome once again to another episode of the Military Money Manual podcast. I'm joined today in person for the first time in over a year by my co host, Jamie. I'm Spencer Reese, founder of MilitaryMoneyManual.com and author of the book, The Military Money Manual, which is available on my website and Amazon.

If you want to check that out, it's all about achieving financial independence in the military. Today, Jamie and I are going to take a little business trip. So we are in Zion national park. We just drove down from Bryce Canyon national park, and we're taking a little bit of time to think about where we want to take the podcast, what we want to do with business, with the brand.

Yeah. And obviously to spend some time together too and have some beers and have some food. And we're lucky on this trip that our good friend, Paul got to join us. 

Hey, Paul. Hey, how's it going?

[00:01:34] Spencer: Been a great trip so far. And we're looking forward to the next couple of days of rafting and hiking and doing other stuff in the Utah area.

[00:01:42] Jamie: We're at a nice CliffRose Springdale Curio hotel, Hilton brand. We'll talk about travel credit cards that we applied on the trip in a different episode. But today, what we wanted to talk about was how to apply for rental real estate or owning extra properties as a method of having multiple income streams or a second income stream.

So our friend Paul has some experience here, so I'll turn it over to you, Paul, to introduce yourself and share a little bit about your experience, and then we'll get into how we can practically do this for our listeners after that.

[00:02:08] Paul: Cool. Thanks, Jamie. So I'm an active duty military officer.

I've got about 10 plus years of experience and three PCSs and each of those places that I've been to, I have either owned property or have lived on base, also have purchased a rental property as well. And then my family has also done a fair amount in terms of investing in rental properties as well. So I've got a little bit to share.

[00:02:30] Jamie: Cool. We're really excited to have you. We've only had a handful of guests. So you're an elite company. There's really two ways that you can get into the real estate market as a side hustle in the military, I would say.

Option one is you PCS somewhere, you buy a house, and then rent it out when you move.

And option two would be you just buy a house that you like as an investment property, Spencer, why don't you break those down for us and introduce the first method of getting involved in real estate.

[00:02:56] Spencer: So Paul, earlier we were talking about Your strategy, which is every time you're PCSing, you're finding a property that's right for you and your family, you're buying it, and then you're renting it out afterwards.

Can you break that down and like how you thought about it and how you went into it?

[00:03:11] Paul: Sure. So as we know there's multiple types of investments that we can get into. The one that has been talked about a lot would be the TSP. And then just investing in Vanguard stock markets and stuff.

And real estate is obviously another that you can get into. And so I've always been interested in investing in and diversifying our portfolio. And what we've done in our moves is each time we've moved, we've found a house that worked for our family. Spencer said invested in it with the intent of keeping it for roughly three to four years.

Typically what we've done, we've either done through a VA, or we've done it through a 15 year mortgage or a 30 year mortgage with the hope, not necessarily the expectation, but the hope that it will increase in value, which typically the housing market will do.

[00:03:54] Spencer: But it might not be over a four to five year period.

So how did you plan? What if you bought property in 2006 on your PCS in 2009 and the value of your house went from, some of those houses went down 50, 60%. Is that something that you factored in your planning when you were, when you're thinking about buying real estate that worked for your family?

[00:04:15] Paul: When we first got invested in this, in the housing market, it was pretty well near the bottom. We benefited from that. However, owning a house is very similar to owning a stock in that. You don't realize losses until you actually sell. And so if you do buy at the height and then it goes down, the nice thing about the housing market is that you can then rent that out to somebody else and recoup some of those losses while you wait for the housing prices to go back up.

[00:04:43] Spencer: So when you're looking for a property. You mentioned that you're looking for a property that's right for your family for three to four years. Are you also considering the possibility of renting that property out after you leave? Or are you just focused on buying a property that's right for your family and then not really considering the rental possibilities afterward?

[00:05:00] Paul: So when we first started getting into it, we were mostly focused on what was good for our family at the time. However, as I've gained more experience, I've learned a lot of other options. For instance, one idea is, especially if you are single, the idea of purchasing a duplex or purchasing a house that has the ability that you can rent out a room.

So you, which is essentially called house . Where you can buy a house and then rent out part of it in order to pay your own mortgage. And then once you've been in that property for a year, you now have that as your own personal property. And then you could actually move and leave and then buy another place that would be your sole residence.

So for instance, if you bought a duplex, you could keep that. For a year and invest in a different one after that year, and then you could then rent that duplex out to two tenants and then go and buy another single family home for yourself.

[00:05:54] Jamie: Yeah, there's a lot of really advanced ways you can get into this.

We talked about in episode four about the VA loan, and one of the things we covered in that episode that you just hit on is that you have to have the intent to stay in that house for at least a year before you turn into an investment property. So make sure you guys keep in all that so you don't get in trouble.

The second way that you can get into real estate as a side hustle or as a second income stream is to just buy a property that looks like it's going to be a good investment property. So one downside we were talking about before the podcast is the difference in the mortgage rate. 

Can you explain why it's different from your primary home and what the difference is?

[00:06:33] Paul: Sure. So the way that the mortgage companies look at it for lack of a better term is that if you are buying a property from a purely investment perspective, there's, perhaps, a little bit more risk involved. And so they're going to increase your mortgage rate. So for instance, what we did in our case is we purchased a house.

And we purchased it on a 15 year mortgage. So we accelerated our mortgage payments, which allowed us to then benefit from having paid down the mortgage more and also benefiting from that increasing housing market. So we were able to sell that house for a nice profit. And then we were to take that money and reinvest it into a pure investment property.

And then what we ended up having to do was the mortgage ended up being about roughly a percentage point higher than we would have paid if we had lived in the house for a year. So there is that disadvantage. And then the other disadvantage with that is that you're not allowed to use the VA loan for a purely investment.

[00:07:32] Spencer: Some of the other considerations when you're purchasing a pure investment property or. If you're going to turn your primary residence into an investment property, then insurance and putting it into an LLC or not. So can you talk to us about what you think for liability insurance?

Who are you using? What insurance are you purchasing? Do you put it in an LLC or now what's the thought process behind that?

[00:08:00] Paul: So, yeah, there, there are multiple ways to do it. And I've seen multiple owners that I know that are invested in investment properties that do it in different ways.

What you can do is you can form an LLC and then you can fund that LLC and then have that LLC essentially buy the property. What we ended up doing is we ended up just buying the property and we. Like my family owns it, then what we did for insurance purposes, we just purchased a fairly large umbrella policy.

It keeps it simpler for us. Cause we really only own one investment property right now, but for folks that are getting into, they want to have two, three, four, five doors that they're invested in, then that's where you definitely want to think about putting all that into an LLC because that it's definitely more of a business type of thing that you're doing, and then you have a little bit more separation.

[00:08:49] Jamie: In episode 30, we talked with Rich Carey, who has recently retired from the Air Force within the last couple of years and had 20 homes while on active duty, now up to 30. His thought on the LLC debate was, if you only have one or two, it's going to be very obvious to the court that it's your money. And then you mentioned with the rental property insurance, do you just pick that up through, USAA or GEICO or what do you use for that?

[00:09:12] Paul: So we use USAA and they've been fairly good to us. I recommend shopping around and seeing what the best rate is and going from there. USA, I know obviously they're tailored toward the military, but they are certainly not the best.

[00:09:23] Jamie: So it's usually going to be a little bit more expensive than the cost of your primary homeowner's insurance, I would imagine.

[00:09:29] Paul: Yeah, it's going to be a little bit more and the main reason for that is typically a homeowner is going to be easier versus you having a tenant. It's not their property and so the insurance company is going to charge a little bit more. So there is more of that overhead cost.

[00:09:43] Spencer: Okay, Paul, so let's take a hypothetical service member PCS to their first duty location and they buy a great property, two bed, two baths deal, two car garage, and they're ready for PCS.

And they're thinking about turning it into a rental property. And they've got, let's say a 30 year conventional mortgage or VA loan. What kind of costs and expenses can they expect to incur if they're going to be converting from a primary residence to now an investment property, essentially they're becoming a business owner, right?

[00:10:14] Paul: So the cost that you're going to be incurring now is that you need to be thinking about the fact that you are now renting this property out to somebody else. They're not going to be easy on it. Things are probably going to break more. You also need to consider that unless you plan on managing the property yourself, which is tough in the military, because typically we own a property and then we move.

And so my personal recommendation is that you at least look around for. A rental management firm in the local area that is familiar with your area and you hire them out. However, certainly not all rental management companies are created equally by onion. So I definitely recommend hunting around that.

That being said, I would say a good rule of thumb is to look for one that is going to charge roughly about 10 percent of a 10 percent fee on top of what your rent is.

[00:11:05] Jamie: Yeah. 10 percent of your monthly rate. You can expect that to go to the property manager is the standard. That's a big chunk of your income.

[00:11:12] Paul: Absolutely. Yeah. And then you have to decide, are you going to be paying for it? Keeping the property well maintained, especially outside. Are you going to have somebody else pay for the lawn care and the upkeep and whatnot? So there are definitely plenty of expenses that you still may have.

[00:11:28] Jamie: Is there an extra fee to, if you hire a property manager for them to find your next tenant, how does that work?

And is that an additional expense?

[00:11:35] Paul: Sure, that's a great question. So for our first duty station, we were thinking about renting our property, but most of the rental property agencies that we talked to, the way that their system worked was that they charged a month's rent for every new renter that came in, which didn't really give them any. So Good reason to keep a consistent renter.

And that's one, one thing that I've learned over the years, just from dealing with my own property, as well as seeing friends and families is that having a consistent, good renter is like gold because then you just don't have to think about it, especially the ones that. Stay there for a very long time. If that rental agency is charging you per time they get a new renter, it doesn't really give them any incentive.

And so from our experience, there are rental agencies that don't charge that fee. And so therefore that's who I would try to go to so that they would get a long term, hopefully a long term renter.

[00:12:28] Spencer: Yeah. As an economics major, you want to align the incentives, right? You want your property manager to be motivated to keep good tenants in there.

And not every 12 months, basically, or every six months, God forbid be trying to find you a new tenant because they're going to collect the full month's rent to get the new tenant in there.

[00:12:46] Paul: Absolutely. The one thing I was going to add, though, is. Being that we are military members, we're living next to military bases.

Generally, it's probably a good idea to maybe consider trying to rent out to other military people because at least there's a baseline standard there, which means you may have some renter turnover, but hopefully that will be, that would be somebody that would stay in there for two or three years and that they would move.

And so one thing you can also think about too, if you're looking at the rent, is that look at what the BAH is in your specific area. And if you want to target a specific renter. You may want to consider what that BAH is for a junior enlisted versus a mid level officer. And you could change that rent or invest in a property that's going to be tailored towards whoever you want to basically tailor your rental property to.

[00:13:33] Spencer: Yeah, that's a great tip I think. Using the BAH basically to guide your decisions and what kind of property you're going to invest in. So let's say you've got your rental property, you've hired your property manager, you're pretty happy with them, they're taking 10 percent of your rent every month.

That can be substantial. That can really eat into your, to your cash flow, into your profit margin. So what are some of the pros of having a property manager versus some of the cons?

[00:13:58] Paul: So I would say one of the biggest pros of having the property manager is that you have somebody that's local, right?

And so if something breaks, you have somebody that's right there that the tenant can call that property manager. Hopefully I should have the connections and whatnot to be able to get that thing fixed very quickly. Same with being in a different time zone. There's a very real possibility you could be six time zones away.

So if you have a renter that calls you, he could be calling you at 10 a. m. His time could be 4 a. m. You're talking about not ideal. And so you get that, you want to give yourself that distance. And one thing too is, time is money, right? And so the more time that you have to invest, is it really worth saving $200 a month. Let's say that you're renting your place out for $2,000. 10 percent of that is going to be $200 bucks. So is it worth paying that company $200 bucks to, so you don't have to take all the calls. Yeah, exactly.

[00:14:51] Spencer: Yeah. What is your time worth, and for. A lot of people, they might say, I don't know, but you can go figure it out pretty easily.

Take your annual salary divided by 2,000 that's working, 40 hours a week, 50 weeks a year. That might not be typical for some military career fields, but it gives you a baseline. If you're making a hundred thousand dollars a year as a more senior enlisted NCO or as a younger captain or mid level officer.

Yeah, that could be probably just about right, like 50 bucks an hour. It's your going rate, but if you're more, even more senior than that, then maybe it's a hundred bucks an hour. And your time is worth it, your time might be worth even more than that to yourself. Just because the military is paying you a certain rate for your time.

Doesn't mean that's what you have to value your own time at.

[00:15:38] Jamie: So on the flip side, some cons. We talked a little bit about the cost and how 10 percent can affect your, the income that you take in. What are some other things that are maybe negatives about having a property manager?

[00:15:49] Paul: Sure. If you get a bad property manager, that can create just as many headaches as having to do it yourself.

One of the biggest things that I've learned is having a good property manager is communication. You want to have somebody that communicates on the same level as you and with the same speed as you are comfortable doing. And so for instance, the property manager that I have with a property. Like they communicate via text with me and they respond typically within an hour or so.

And that's nice. That's the kind of communication that I like. If you have somebody that is not communicating with you on the level that you want in terms of responsiveness, then you're probably going to get frustrated. And that is going to then cost you in terms of, like I said, frustration.

You may get worried about what's going on with the property. If they're not responding to you, like that kind of thing. And then also just how detail oriented they are.

[00:16:37] Jamie: If you're really detailed and retentive about everything and your property manager's not, then that's probably going to induce them.

[00:16:43] Paul: So yeah, exactly. Yeah. So the bottom line is that can, it can be a potential con if you don't do your homework and what I would recommend doing is interviewing a couple property managers to make sure you're finding the one. That at the very least you get a good gut feeling from, and then if you, and then the nice thing too is if you don't like that property manager, then you can always find a different one.

But I definitely recommend doing your homework and trying to find a good one at the beginning because that can definitely be an issue.

[00:17:11] Spencer: Yeah, because if you invest the time in interviewing three, four or five property managers, that might take a lot of time. But once you find the right one, or once you are able to compare five of them against each other.

And you're like, okay, that guy was great because when I texted him, he was responding within a couple of minutes. And that's the kind of response rate that I want for my property manager. That's just going to save you so much hassle down the road. So I think that's a great tip to make sure that you're.

Interviewing multiple property managers. You're not just going with the first one. I think another tip that's worked for me, not for property managers, but just for anything in life is ask around, if there's other people that you know, that own rental properties in that city, get referrals, and then that's a great place to start.

And if you interview someone that you got a referral with, and they're not a right fit, get another referral to talk to somebody else.

[00:18:00] Paul: Yeah, absolutely. And that's actually how it worked out for the property manager that I've had for the last roughly three years. Now, it was a referral from another friend that owned a property in that same city, and he referred me to them.

And then I was able to go and talk to them and everything just clicked from there.

[00:18:14] Spencer: One thing we haven't talked about is maintenance costs. That can cover everything from. Leaky pipes when like emergencies or like things breaking to just general recurring expenses, like a homeowner's association, HOA dues.

So what are, do you have any tips or tricks for budgeting for those expenses? And, is there a certain amount? Of cash or capital that you would advise a service member to come in with.

[00:18:40] Paul: So what I recommend doing, just like Jamie and Spencer talked about in the past, is you should have an emergency fund saved up.

And so that's going to depend on how expensive your property is, where it is, just the area, there's high cost of living areas, there's low cost of living areas. Spencer, I think you had a good rule of thumb to look at. 

[00:18:58] Spencer: I heard this on another podcast recently. It was Ramit Sethi's podcast. He wrote the book, I Will Teach You To Be Rich.

A great book really got me started on my journey to financial independence and a pretty good podcast as well. But he mentioned that he always factors in a 50 percent margin whenever he looks at a mortgage rate. His example was initially hotel rates. So if you see a hotel, that's about $200 a night. By the time you factor in all those phantom costs like valet parking and taxes and fees, resort fees, and before you know it, that $200 Nightly rate is now a $300 nightly rate.

So that's his 50 percent rule for hotels, but he does the same thing for rental properties and for purchasing a home. So if the mortgage is, let's say a thousand dollars a month, he's going to look at that and say. I expect all the phantom costs, all the little, I need to replace the refrigerator because it broke, or I need to, there's a homeowner's association involved, it's going to increase the monthly cost by 50%.

So that thousand dollar mortgage is going to become a $1,500 month mortgage. And I think that's a, I think that's a great rule of thumb to just prepare yourself right for the sticker shock of it's expensive. There's always additional costs there. There was another podcast I was listening to recently.

Sorry, Jamie. They were talking about how I think it was actually the military dollar. I'll give her credit for this one. It's a good blog out there. Just Google the Military Dollar and she should pop up. But what she was saying was when you've rent a place, the rent you pay is the most that you will pay every month.

When you buy a place, whether it's an investment property or a primary residence, your mortgage is the minimum you will pay every month. That's the first time I've ever heard of anybody putting it that way. And I think that's a great way to cage your brain to think, okay, the rent is $2,000 a month.

And oh man, a mortgage is $1,500 a month, but we just talked about the 50 percent rule. So you got to bump that mortgage up by $750 and it's not going to be in at the end of it. You're guaranteed to at least spend $1,500 a month on the mortgage, but the most you'll ever spend on rent is $2,000 a month.

[00:21:15] Paul: Yeah that's a really good point. And then that goes into something else I'd like to talk about when it comes to rental properties and that's the idea of cash flowing. And so when you get into a property, Every single property that you get into, especially if you are purchasing a property as an investment, you need to analyze that property and make sure that it is going to cashflow for you.

And what that essentially means is, are you actually in the green every month? And so you'll hear people talk about how my renter is paying my mortgage. That's great, but are they paying for all the other expenses that you're incurring as well? And so that's where it's important to make sure that when you look at a property.

Not only are you looking at what your mortgage is, but also adding on that, those additional costs, and then look at what you can charge for rent. So that way you have at least a bit of a cushion. You'll be hopefully in the green most of the time, instead of being in the red most of the time, because you may have some large expense that comes up, such as you need to replace a floor.

That's what I'm going to have to do with my property right now. And so that is an unexpensed. I wasn't expecting this two weeks ago. It has to happen. It's not something that you can just put off. You have people in there and you've got to take care of them. Those are those unexpected expenses that you've got to take care of and you've got to be ready for.

[00:22:31] Spencer: And tactically, did you have cash set aside in a separate account to cover unexpected expenses like that? Did you have an emergency fund for your rental property?

[00:22:41] Paul: Yeah, that's always the goal. We, for us, we keep generally like a one large fund that we use for like our entire family. But part of that fund is also for paying for rental property expenses as well. And so there's multiple ways that you can do it. I actually would not recommend doing it that way. I would recommend having a separate bank account at the very least. So I would say learn from my mistakes because what I'm doing, I would not actually write, especially if you start to build a couple of properties.

[00:23:08] Jamie: Do you have any apps that help you calculate the target cash flow per month or any other resources you'd like to share?

[00:23:14] Paul: Yeah. So one of the, one of the main apps that I used to decide what rental property I wanted to target when I purchased mine was this app called deal check. And it allows you to put in the purchase price and then it allows you to put in what you expect your mortgage rate is going to be, how much you put down.

And then you can insert how much you expect, you're going to pay per month in expenses and whatnot. And then it'll, it, it will then spit out a number for you in terms of your return on investment. And it'll give you a good idea if this is a good purchase or not. The other resource that I've used over the years is there's this website out there called BiggerPockets.

They have tons of podcasts. They've got a lot of really helpful info on their website. I would recommend just going to their website first and just start digging in there. When it comes to investing in rental properties, just like anything, do not go into it without any knowledge, make sure that you are doing a lot of research.

Yeah. As we like to talk about this, you may have heard in, in, especially when you're investing with other assets, do your due diligence and make sure that you understand the process first.

[00:24:21] Spencer: So have you learned anything about dealing with HOAs or like their rules and the costs associated with that?

I know that when I had a rental condo in Tacoma, Washington, one thing that we ran into is they didn't allow short term rentals. We had an Airbnb set up for a while when I was deployed and the HOA basically sent, yeah, sent us a warning saying, Hey, per our HOA agreement, you can't do short term rentals. Do you have any experience with those?

[00:24:48] Paul: I do have a little bit of experience with HOAs at one property that we've owned. And I would say overall, it was a positive experience in that we were involved in the HOA and we, so we actually helped move the HOA in a direction that we wanted it to go in terms of also setting fees that we were charging for the HOA and whatnot.

And so when it comes to HOAs, my biggest piece of advice is learn about what they are charging and what it is that they are providing for you before you buy the property. So for instance, The property that we owned at one location, the HOA fee was less than $50 a month, and they helped just keep everything in good shape and keep housing values up versus another place, another area that we've lived, HOA fees are $500 plus, while they may offer better amenities, that's money that you are simply just paying towards them, and it's And hopefully you're getting those amenities, hopefully you're getting a good value out of those.

It's not paid off by your principal or anything. Exactly. Yeah. So it's, it is purely an expense, especially if you purchase this as an investment property. And so that can be a huge attractor from how much you could possibly. Make it rounds if you're paying into that, so make sure you are doing your due diligence and understanding what that is.

[00:26:02] Spencer: So Jamie, I'm not a big fan of rental real estate, hearing Paul talk like he's made it successful like he's cash flowing on his properties. So somebody listening to this might think. You know what? I'm a hard worker. Like I want to get into it. Sounds great to own. Sounds so easy. It's, it sounds like a good strategy to, to boost my wealth and my monthly income.

But what are some things that a military service member should have had taken care of, before they consider getting into rental real estate investments?

[00:26:32] Jamie: So don't let the excitement override basic financial principles that we talked about on this podcast and that are in Spencer's book. For example, if you're still paying off credit card debt, you probably don't need to be going out and buying a second home and trying to rent it out.

You're probably not quite ready for that yet. If you or your family don't have a fully funded emergency fund, you're not in a good financial position, because even if it quote unquote cash flows and it pays you $200 a month, emergencies are going to happen. Like Paul mentioned, you're going to need a new roof every 15 years or whatever they last.

Now you're going to need a new hot water heater, new fridge, that stuff's going to come up. So if you're not in a position to have a fully funded emergency fund

already, you're probably not in the position to have the cash reserves that you need on hand. If you're struggling to make ends meet right now, then just put this off for a little bit.

It can be a passion of yours. You can start the research and the studying that Paul was talking about, listening to podcasts, reading books without actually executing yet. And if the basics of personal finance aren't there we talked about debt, but if you're not already investing in your TSP and IRA, and you don't know what the difference between those two are, then you're still a beginner.

And that's okay. We all started somewhere, but this is a more advanced income stream strategy. And we would recommend waiting a little bit more if you're in any of those. 

And the last thing I'll add is you have to have a passion for real estate. Because it can be a lot of work. So if this sounds overwhelming to you, then it's probably not for you. And if you're already very busy, then it might not be for you. So it has to be something you enjoy doing. I think to really make it successful and rewarding for you.

[00:28:00] Spencer: I think just summarizing everything you said, Jamie, if you don't already have the good habits, if you don't have the good personal finance habits that are going to lead to success in real estate investing, then don't skip ahead, right? Yeah, exactly. Like you need to focus on the basics. You need to build a foundation. You need to be able to run a 5k before you can run a 10k. Yeah. If you can't just, you can't just skip the distances.

And, like you said, if you don't understand the difference between a TSP and an IRA, you got some research to do. And that's just, that's just basic foundational knowledge of your financial situation. And if you're not there yet, then that's okay. Like you said, it's, we all start somewhere.

Like I didn't invest my TSP for years when I joined the military. Cause I frankly didn't understand what it was and what it offered because nobody sat me down and explained it.

[00:28:47] Paul: Yeah. And I was going to just add a personal note with that. Before I purchased my first rental property, I had been doing research on it and tried to learn about it for roughly six months.

And that was listening to podcasts, reading books, reading articles, understanding what it is that I needed so that I could make a sound financial decision instead of just blindly going into purchasing a rental property. 

[00:29:12] Spencer: Jamie, you saw a Facebook post the other day that this discussion is reminding me of, which was about a person who was it that they were deployed, had a rental property, and they were falling behind on their debt repayments.

Do you remember this?

[00:29:27] Jamie: Yeah, I think it was something about them being deployed and they were having a hard time making ends meet, but they were generating $200 a month of cash flow from a rental property. And asking a question about The best way to handle it is if you're struggling to make ends meet and you have a rental property, it's probably elevated in price right now, probably artificially, in my opinion, it might be a good idea to just sell it and then you can take the profit of the sale and give yourself some buffer and get your emergency fund back.

If you're really struggling with this and you think that the $100 or $200 a month that you're getting on top of your mortgage is going to cover the needs of owning a rental property, you're probably going to get called to the table on that at some point in the future. So be real careful with that.

[00:30:06] Spencer: Paul, one technique or strategy that military service members have started doing that I've seen popping up at different consolidated training locations is the idea of crash pads where you have military service members going TDY for weeks or months at a time to these places, but it's not a PCS, so they're not, they're keeping their old home, and they're just going TDY to these locations, and they don't want to live on base where the lodging might not be great, they don't want to live in a hotel room, they want to live somewhere where they have access to a kitchen, and Where they have, maybe a backyard or a garage or something, and they can possibly even bring their pets and family as well.

That's something that is really important for military service members when they have the opportunity to do that. So can you talk at all about the crash pads strategy military real estate investing?

[00:30:55] Paul: Yeah. So that is definitely a solid option as well that you could look into. And so the thing to be aware of with this is that it's a slightly more high risk investment in that what you are doing is you are taking advantage of the JTR.

The joint travel regulation stipulation that you can always receive up to the, essentially the lodging rate that you would pay on base. And then you can take that lodging rate and then you can go live off base somewhere. So that can either be a hotel or it can be a house or whatnot. And so the predominance that you'll see of these crash pads is as Spencer said, for those of us, like pilot types, it's going to be places like Altus, it's places like Randolph, Luke, where you have people that have completed their initial training, but are going through for follow on training. So they're not PCSing. They're just at a place for maybe six months as they're getting their training done for other AFSCs that could be at places where people are deployed to quote unquote, such as Shaw where assent is, or you could think about other bases that are in a different DOD branches.

And so if you're in a different branch of the military beyond the Air Force Think about the basis that you are aware of where people typically go for specialized training. So if they're there for maybe four to six months, they're there as a TDY and not necessarily a PCS, that may be a business opportunity for you, but realize that this is more of.

I guess a little bit more high risk. It also is a little bit more involved because you are now really running more of a business and you're trying to compete with on base hotels, off base hotels, in that you are trying to now rent out rooms or an entire house to some family and trying to get their eyeballs to look at your particular property.

And you need to show them that what you are offering is a much better alternative than living on base at the Air Force Inns.

[00:32:50] Jamie: Which might not be hard to do,

[00:32:51] Paul: And that is the thing with it is that if you are interested in that, and especially this is, like I said, this is a much more involved process.

There's also more of a higher investment cost initially, but the rewards can be higher as well. There are definitely risks involved. For instance, the base commander could choose to just shut things down, you could have a global pandemic coming on that could make it so you could only rent out one room.

There are risks involved, but again, the rewards can be high if you, if that's something you're interested in.

[00:33:22] Spencer: Yeah, so like they say, no risk, no reward. You're taking a higher risk. But all it would take is, some GS employee rewriting the JTR, and they slip a line in there that says, The service member must stay at a recognized hotel by the American Hotel Association, right?

And then all of a sudden that blows up all your crash opportunities because they can no longer stay at that. The other thing you mentioned there is, you're running a business and when you're running a crash bad, you have to focus more on the marketing. And getting the attention because you're competing against a lot of other crash pads potentially in the area, but also education, because I know that when I first joined the military, I went to a long TDY for specialized training.

I thought you had to stay on base and I was afraid to go stay off base. And that was because nobody sat me down and taught me. You didn't even get the Hampton Inn? No, I didn't. I was at the beginning of my diamond journey. I know. I passed out on all those Hilton points.

[00:34:18] Jamie: Ate a terrible amount of continental breakfast.

Oh, gross. Paul, what about down payment? Are there any different considerations for rental properties down payment compared to your primary home? Any recommendations, personal tips, or anything like that?

[00:34:30] Paul: Absolutely. Hopefully you've heard of the VA loan. That's a key benefit that we are offered as service members.

Key with the, with the VA loan is that you can only use it for your primary residence, but it works out well in that if you purchase a property and maybe have an idea that you want to use it as an investment later, you could purchase that property using the VA loan, get the benefits of that, and then rent the property out later.

One little factoid about the VA that I want to dispel any rumors with is that you can use the VA multiple times. There's just a limit to how much you can borrow. So if you have a, you purchase a house for $200,000 and you put $50,000 down using the VA loan, you can then purchase another house potentially up to the limit of what the VA offers.

The other option is to go with a, perhaps a conventional mortgage, which you essentially would have to do if you're purchasing an investment property. And in that case, I would at least recommend that you save up enough money in order to have a sufficient down payment with 20 percent of the purchase price being the recommendation because that allows you to avoid having to pay an additional fee of private mortgage insurance, the PMI.

You can do it without, you can do a conventional mortgage with a lower down payment. You just have to pay more upfront because now the mortgage company is assuming more risk on you because they are taking on more of the value of the house, which you have to account for in your cost calculations and your profit.

Sure. Yeah. So again, I definitely recommend using an app or some other way to analyze the property and decide what is the best for you. My personal thought process on it is that I want to. Avoid any extra expenses that I can. And so I chose to save up enough of a down payment in order to get 20 percent down on the house that we purchased.

[00:36:26] Spencer: So Paul, at real estate investing you do have this enormous advantage of using leverage. So you can talk about how military service members can use that to their advantage to grow their real estate portfolio while they serve.

[00:36:40] Paul: Yeah, so the neat thing about real estate leverage versus stock leverage is that unlike the stock market, where if you purchase a stock on margin and that stock all of a sudden loses 50 percent of its value, you can get hit really hard versus with a house, typically the values Fluctuate much slower, generally housing markets are going to go up and not a linear line, but they will slowly increase.

But the nice thing was the way that our housing market is designed is that we can purchase a house that may be worth a million dollars, but we only have to put $200,000 forward on that house, obviously that's a big number. We could say, a $200,000 house and only have to invest $25,000 or $50,000.

And so you own, you have that property and the value of that property, but you only have that small amount invested. That is definitely a positive aspect and an advantage of investing in real estate is that you can actually get into, if you started investing in smaller, cheaper properties. You can start building wealth that way, using that leverage, and then you can continue adding more properties as you are able to build equity in that house and then purchase another property using that equity.

[00:37:55] Spencer: Yeah. One thing that I've always been wary of for real estate investing is if let's say that you have a $50,000 portfolio, right? Like your GSP is $30,000 and your Vanguard stock index fund is $20,000 and you go and buy a $200,000 property. Now all of a sudden, do you have 20 percent of your portfolio, essentially invested in the stock market, your total net worth and 80 percent invested in this one house in this one location.

To me, that's always been scary in terms of a diversification aspect where. When you buy a total U.S. stock market fund, you're buying $3,000 companies scattered all over America, producing all kinds of different things, from Boeing, making jet planes to Apple, making iPads and iPhones, that diversification of the U.S. stock market. It's huge, when, and you can buy that for not almost nothing, the Vanguard tool stock market fund costs like three basis points a year now, but when you're purchasing a house, you're basically, you're betting on that particular piece of property in that particular town, in that particular state.

And sometimes things go wrong. You need to make sure that you have a backup plan, essentially. And you need to just be careful, if you don't ever want to put all your eggs in one basket. And I think that's one thing that's always put me off of real estate investing is the diversification aspect that until I had a sufficient.

Stock portfolio to balance the large investment into real estate.

[00:39:27] Paul: I definitely agree with the diversification aspect of it. When we started investing our own money into rental properties, we already had a decent portfolio built up. When I put money into our investment property, I put that money into it, knowing that it wasn't going, that if it went belly up, if it did not work out that my family would still be okay.

And so it allows me to sleep well at night, knowing that I haven't put so much money into one thing that's going to possibly destroy us if, if it didn't work out. And Spencer does bring up a good point especially if you are investing in a rental property. That you are renting out to somebody say that you rent out a place in Oklahoma, there's always a chance that some sort of catastrophic thing could happen if it level that property, there's always tornadoes, there's always tornadoes, if you're living on the gulf coast, there's hurricanes, there's earthquakes, any of those things can happen.

And while you wouldn't necessarily be out the value of that property because that's why you have insurance, it still takes months and months to potentially repair or rebuild. And that is lost revenue for you. And so that is just something to consider in terms of an additional risk when it comes to investing in properties and why we still recommend keeping that portion of your portfolio.

[00:40:41] Spencer: Paul, thanks so much for coming and talking with us today and also coming with us on this trip. Yeah. It's been pretty awesome. What are, just before we wrap up here, what are two tips that you would offer? To anyone who's interested in this, what do you wish someone had sat you down when you were getting started in real estate investing and said, Hey, Paul, here are two things that you swung out for.

[00:41:04] Paul: Yeah, absolutely. First thing is, like we talked about before, make sure you're doing your own research on this. This podcast is a very top end look. I recommend just like any other business that you want to get into, you have to look into the nuts and bolts of it and what that means you need to have a business model.

Take a look at how much you think you can bring in versus how, what your expenses are and move forward with that and make sure that you're looking at other, lots of different properties that in that particular area that you may be targeting and then find the property that you think is going to work well for you and look at the numbers.

The other thing is, especially once you are a property owner, You need to expect the unexpected, crazy things can happen. I've had multiple random expenses that have been in the multiple thousands of dollars that have come up on my property and realize that you also have lots of moving pieces in that you have people that you're dealing with, both with your property managers, as well as with your tenants.

And so there's a lot of moving pieces with property ownership. And so expect weird things to happen throughout the year. Even if you have a property manager. You're still going to have to deal with things that are going to take your time and are going to take your money. 

[00:42:17] Jamie: Thanks so much, Paul.

I think my three main takeaways for today are that real estate investing may be a great option for some people, but like we talked about, make sure it's right for you, you're at the right spot in your financial journey. And that you're prepared for the downsides, the extra expense it's going to incur and things like that.

So it's a good option for some. Number two, do your research on property managers, which one's the best to interview them, the numbers that you can expect expenses. You can expect just a lot of research and study is going to be involved here. And then number three, make sure you have a plan for routine maintenance and irregular maintenance, big things like a roof or things that come up as well as emergencies.

If you're not set up for that, then owning a rental or a second home is going to be a more stressful experience for you than you probably want it to be. 

And we want money to add value to your life, not stress to your life with that. We thank you guys for listening today and for bearing with us in the first back together podcast in a long time.

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