Investing for retirement (TSP, IRA)

[Guest Touch & Go Rentals]

Check yourself.

You are calculating a return based on $200k. That $200k is leveraged with $40k if he put 20% down. Run your $8-12k returns against the $40k, not the $200k and you're looking at 20-30%/yr.

I've thought more through the numbers, and you are right about the leverage; however, you're looking at absolute best case ($1500/month, 5% mortgage interest, no repairs). These numbers also don't include property taxes, insurance, or management fees, which could run annually around $1000 (higher or lower depending on the state), $1000, and $1800, respectively. Your tax savings is about is about $1818 on your home ($200K, straight-line depreciation, 25% marginal tax bracket), but it's actually less than this because your depreciation will result in an increased capital gains tax at 15% (there are some loopholes) on the sale, resulting in a net tax savings of approximately $730. When you include 5% mortgage interest, your net profit is closer to $6930 per year, and that's assuming no vacancies or repairs. You're a lot closer to 17% (best case) return on investment, and you're on the hook for a $160,000 mortgage. If you're at 92% vacancy (only one month/year, or three months between 3-yr leases), your return drops to 13.5%

This calculation is based on the first year of the rental. Over time, your return on investment will increase as your interest payment declines and your risk will reduce as you pay down the mortgage. Nonetheless, what's the answer to the original question?

Bit of a thread revival but does this logic still hold water as an investment strategy given the events of the last few years? Because I know guys that bought a house at their UPT base are now renting it for less than what their mortgage is and they are now moving to their first "permanent" duty station and they are running out and buying another house. I just don't think being well over 300k in debt on one income making less than Captains pay is a good place to be in.

I've shown that rentals on margin, bought initially as homes you would live in (without a significant discount) is not a substantial investment when you compare it to the 25-year trend in the market. Especially when you're accepting substantial risk in the rental home (absentee landlord, possibility of vacancies) and more work required. This is on a home on which 20% down was invested. You can get better returns on your money when you invest nothing, as in the scenario Magellan originally presented, however, you're accepting far greater risk, and you annual profit is closer to $4930, or $3430 when allowing for vacancy. In this case, I suppose your return on investment is infinite, but is $3430/year really worth it?

And how would you like to have to handle an eviction during a deployment? Or a rental agreement? These things can be delegated, but I haven't found anyone who is as motivated as I am when my money is involved, and this delegation it cuts into your profit.

And to add a second property on top of it? Also without a down payment? I have yet to hear of anyone clearing $8-12K since asking it earlier in the thread. Again, this is against conventional wisdom, but has anyone gotten rich off highly leveraged real estate over which they landlord from a different state? I'd be interested in hearing someone's experience.

If you're in it for the long-haul, and you don't have enough to buy a home at a discount and can't manage it yourself/locally, I think you're much better off with a $40K investment in an average APR of 10-12% in the market (10% is the average over any 25 year period--invest slightly more in growth stock/funds and you can push 12% or higher), yielding $675 - $1.2M over 30 years (after taxes) for an average yield of 60% to 105% per year, and your average grows exponentially every year. If you're not in it for the long-haul, I think in many ways the case is even more against rentals, as most of the costs are incurred in the first few years.

When you settle down from the Air Force, you would have enough to buy several homes/condos at a discount after researching the area and watching the ads and you could earn significantly higher return on your rental with much less risk.

Edited June 24, 2010 by Touch & Go Rentals