A forum member by the name of Nords started this site specifically for military personnel interested in early retirement...may want to give that a look...he is a wealth of knowledge in this arena.
https://the-military-guide.com/
@Nords mentioned?
Thanks, Andy & MrTD!
And welcome, Shibby.
She is on board with the FIRE lifestyle but she makes frequent small purchases. To avoid becoming overbearing with her spending, I don’t worry much about this as she continues to contribute to our monthly expenses and investment goals.
This question comes up a lot, and the best solution is to give each other an allowance. Whether it’s $50/month each or $400/month each, it’s yours and hers to spend. There’s no tracking (other than the budget category of “allowance”), no justification, and no judging. You can spend it all in the month or you can roll it over and save it for a big goal.
This not only avoids the debates over who bought which for whatever reason, but it also helps both people in the couple make the team effort toward financial independence. Nobody has to worry about one spouse being the Budget Police or the other pushing back against the spending policies.
When we leave our current location in a year, our recent house purchase will effectively become a rental. We also do not plan to retire to this area so it’s not our forever home. One of my main goals is to be mortgage free in retirement. I have the means to pay this mortgage off in 11 years (effective retirement date) if I want to and sell for cash to buy our retirement home with. I do not feel confident that this is the most financially efficient choice and there are multiple ways I can envision this. Should I focus on paying this mortgage down or just make the minimums? Make the minimums, sell in 11 years, put the equity on a retirement home and pay the difference by selling investments is also an option. Putting just the equity on a new home and carrying a mortgage balance to hedge inflation is also an option. Any advice on the best path is much appreciated. Feel free to analyze my spending as well.
My first suggestion, while you have the time, is to learn the real estate numbers. You mention renting it out, and I suspect that’s perhaps because you lack the equity to pay the sales commissions and your share of the closing costs. Yet you need to make a cold-hearted financial decision whether to sell or landlord, because paying $15K in closing costs to sell now is cheaper than losing $200/month (after expenses & taxes) for 11 years.
Yet you’re also not sure whether your cash flow will stay ahead of the landlording expenses. “High-demand military base area” is not a market analysis and does not tell you whether you’ll break even or lose money. Real estate appreciates at about the rate of inflation unless you happen to have picked a location that suddenly becomes hot for local businesses or lifestyle. You can’t depend on appreciation.
Basic thumbrules for real estate investments (the 1% and 50% thumbrules) suggest that carrying a property valued at $220K would need to rent for $2200/month. (Unfortunately market rents are typically lower.) You’d also spend an average of $1100/month on operating expenses (mortgage, taxes, insurance, maintenance, property manager) and repairs. However the principal & interest payment is already $1110/month on a $219K 30-year loan at 4.5%. You’ve already accounted for $1500/month average carrying costs without a property manager. Then you’d spend more money on repairs, an occasional new roof or air conditioning, tenant turnovers, and vacancies... all while still having to pay the mortgage no matter how poor your cash flow might be at the moment. We’re even assuming the world’s best tenants.
You might have already blown through both of the basic thumbrules for rental-property expenses. If you're renting at $1700/month then you're still losing money.
As a landlord, you’d want an emergency fund big enough for a new roof or a three-month vacancy or some other large once-in-a-decade expense. A reasonable number is $10K and a conservative number is $20K. Yet your liquid assets are roughly $22K among cash, Betterment, and (maybe) Lending Club. Now you’re looking at a TSP loan or a big credit-card charge.
If your tenants are military (“high-demand military base area”) then that’s a minimum of a month of vacancy every 2-3 years (plus repairs and cleaning and advertising and property-manager’s additional tenant-screening fees). How would you feel about carrying $1100/month (minimum) while you’re thousands of miles away?
You’re essentially hoping to earn more as an 11-year landlord than you could by investing in the stock market for a decade. If you weren’t a landlord then you could be investing more in the TSP or contributing to your Roth IRAs or putting even more to work in taxable accounts. The home is a gigantic opportunity cost, plus you're working harder as a landlord and carrying all the financial risk.
The “easy” way to deal with this situation might be to take the $15K loss on selling now. Then you can rent until you find an investment rental property or at least expect to stay in the same location for 7+ years. If you’re traveling after the military then you might not want to be a homeowner for a decade or so.
If you don’t already know how to landlord or analyze rental expenses then start reading the BiggerPockets website to learn about cash flow and capitalization ratios. Subscribe to their weekly e-mails for 20-minute doses of knowledge on market rents, hiring property managers, finding tenants, depreciation & recapture, and your taxes. When you hear people say “The rent pays the mortgage”, that means they’re actually losing money. If you lose a little every month for 11 years, that means you’re essentially running a charity for tenants.
Other resources would be Rich Carey of RichOnMoney (an Air Force servicemember who’s reached FI on rental real estate) or David Pere of FromMilitaryToMillionaire (a Marine out here at Kaneohe, also a RE investor who can analyze cash flow). At the very least you should drop by your base’s family financial support center or even Navy-Marine Corps Relief Society to get help with a rental cash-flow analysis. Those last two groups would rather see you now instead of after you’ve wiped yourself out on landlording expenses or get behind on a mortgage.
The answer to your pay-down-the-mortgage question is “Not yet.” You don’t have enough cash reserves, let alone a handle on the rental-property numbers. Start saving more in your Roth IRAs (in a Vanguard account, perhaps a short-term bond fund) or a high-yield savings account. Build up your landlord emergency fund while you crunch the numbers on the landlord-or-sell decision.
Expected ER expenses: Unknown at this point, but it is my goal to be mortgage-free and have money to travel. We have cheap, fulfilling hobbies (fishing, hiking/biking, play instruments, art), value efficiency in our vehicles, etc. Our biggest expense-related goal would be to see the corners of the world while health is on our side.
You could project your retirement expenses at today’s spending, which would be a conservative estimate. Then tinker with the numbers to reflect more travel, less time in your residence (rental or home), less commuting expenses, and reasonable expenses for hobbies.
The good news here is that military retirees get Space A privileges on military flights around the world, and you’ve already figured out how to travel hack with rewards cards.
