The Military's Unfair Advantage Making Money in Real Estate

Obviously we here at the Military Wealth Coach are fans of real estate investing, as we've just wrapped up a couple months' of posts -- along with several episodes on the Service and Wealth Podcast -- teaching the fundamentals and benefits of real estate investing. Indeed we've done almost all of it: long-term rentals, AirBnBs, monthly rentals, rent-by-the-room, TURO, fix-and-flip, land flipping, private lending, and most recently the legendary BRRRR (Buy --> Rehab --> Rent --> Refinance --> Repeat).

Investing in real estate in any form has strengths and weaknesses, and before you can start you have to invest time and energy learning about the asset class and how to invest. Most argue that with 500 hours of self-study, whether that be reading blogs, watching YouTube Shorts and Insta Reels, or listening to Podcasts, you can become an expert. You'll need at least 50-100 hours before you even know which way is up; while you may not need to get all the way to 500 hours before you start, every hour invested in your knowledge base will pay off once you get started!

Learning How to Make Money in Real Estate

Beyond learning about loans, inspections, appraisals, contingencies, Ownership + Encumbrance (O+E) reports, and all the other elements of the paperwork, land, and building, you've also got to learn how to turn an investment into profit. So don't skip on studying that: in fact, this post will get you the start you need!

Most people who decide to try real estate investing already have some experience buying and selling stocks, and might even consider themselves "investors" because of this. They are probably familiar with the time-tested strategy of "buy low, sell high" to make a profit. With a bit of additional experience and savvy, they are probably also aware of dividends, giving them a second way to make profit on stocks and bonds.

Someone bringing this knowledge to real estate would therefore easily identify the two ways that they could make money: buy low and sell high, and charge rent to tenants that is more than their costs of ownership, generating monthly cash flow and sale profit (capital gains). But with real estate, this is just the tip of the iceberg, and to really hit home runs you need to learn the other ways. When you know all the ways you can (and will) make money in real estate, you can accurately evaluate a potential investment (this is called a "pro forma", or a normal and formal step in assessing real estate investments).

If your pro forma is weak and misses out on ways to make money, you will struggle to ever make your first investment, because you'll pass on opportunities that are actually profitable. But when you know all the ways a deal can turn out profitable, you will be even more successful.

The "Core 5" Money-Makers

Ask anyone in real estate how you can make money on an investment, and you'll get the same answer. It is so locked-in that everyone chases these same five money-making opportunities:

1. Appreciation

This is the "buy low, sell high" method. You buy a house for $250,000; it follows the historical average of gaining 3.5% in value each year, and after 8 years is worth $330,000. There is $80,000 in appreciation, or profit. People who dismiss real estate focus on this 3.5% rate of appreciation and scoff at the low Return on Investment (ROI), but they fail to recognize that this ROI is amplified by your leverage. If you bought the property for 20% down, you have a 5-to-1 ratio, and to calculate your ROI you multiply your leverage by your rate of appreciation; in this case that gives you an ROI of 17.5%!

ROI = Appreciation • Leverage

2. Cash Flow

This is the second obvious one: you collect rent from your tenants. By researching "market rents" for your area, you can find how much you can collect for a specific property. For example, if you are investing in Norfolk, Virginia you can find that a 3 bed, 2 bath single family home (SFH) will rent for about $2,100 per month. From this you would subtract about $150 for vacancy loss, $100 for maintenance, leaving you with $1,850 net; next determine the monthly mortgage on the purchase price. If this is a $280,000 home and you're making a 10% down payment, you can finance the remainder for about $1,750 a month. That leaves you with $100 Cash Flow per month -- you may have found a winner!

3. Amortization, aka Principal Paydown

When you buy your home and live in it, you pay the mortgage each month, part of which pays interest on the loan and part that pays off the amount you owe, or the "principal." For a $250,000 loan at 5.99%, each year you'll pay the bank about $16,000; in the first year, only $2,800 pays off the principal while over $13,000 is interest alone. Each year, more and more goes to pay off the principal, and in this case after 8 years you will have paid back $30,456, and your loan balance will be $220,000(-ish). When you own a rental property, you still send the bank a check, but this time it's with money from your renters. In other words, the tenants pay off your mortgage. In this case, during those 8 years you owned the rental, they would have paid down your mortgage by $30,456, so when you sell the property you get an extra $30,456 profit.

Many new investors think real estate isn't profitable enough because they are hyper-focused on the cash flow, and feel ripped off to cash flow "only" $100 a month on a $30,000 investment. That's still a 4% ROI, aka Cash-on-Cash Return (CCR), which adds to the 17.5% ROI you get from appreciation, so not too bad -- but when you add the amortization of another $30,456 profit, your ROI shoots even higher (we'll give the full breakdown at the end of the post!).

4. Tax Advantage

First and foremost, don't buy a rental property just for the tax advantage! Even if you can write off $10,000 on your taxes each year for owning it, that is unlikely to turn a profit if you're losing $400 a month paying for Association dues and maintenance, or if you overpaid for a shiny new build that doesn't appreciate. On your "pro forma", tax advantages should be the "gravy": make sure you have a profitable deal from cash flow, ROI, and Return on Amortization (ROA), then see how good it can really get with tax benefits. These range from deducting expenses for repairs, deducting local property taxes and loan interest (on your house these will rarely exceed your standard deduction, and won't save you anything, but on investment properties you always get these deductions to count), and depreciation.

5. Inflation Profits + Rent Growth

When you finance a property, you typically borrow from the bank on a 30-year or 15-year fixed term. That means that your interest rate AND monthly payment will never change (if you don't refinance). For our Norfolk home, the Principal and Interest (P+I) part of your mortgage payment is $1,509.25 -- and always will be. Meanwhile, core inflation in the US has averaged 3.1% per year since forever, which means each year there is 3.1% more money in circulation, and prices tend to go up that same amount. Over time, wages rise to match this, and so too do rents. That means after 8 years incomes, prices, and rents will generally have gone up 27.7%. The $2,100 rent you charged in year 1 as a landlord will follow, meaning you should be collecting about $2,700 a month while your mortgage payment stayed the same.

Over time, you have more money to pay off the same mortgage, and the value of each dollar spent on the mortgage becomes less and less. This "inflation ROI" gets added to your total deal ROI!

The "Bonus 2"

Depending on where you do your research, one of these may pop up as a core source of profit, but not everyone in real estate agrees on them. We also don't consider them as as part of the Core 5 because they just don't apply to every situation:

6. Equity Capture

When you pay or invest less than a property is actually worth, you are making money on "equity capture." In some cases such as a short sale or off-market deal, this can result in "instant ROI": you buy a property off-market or at auction for $70,000, knowing that every other house in the neighborhood is worth $125,000. You could immediately sell your investment on Zillow for $125,000: you "captured" $55,000 by finding a great deal. These are the "gold mines" that every investor is looking for, and it is cutthroat. By all means go after it, but realize it will be hard to find!

Another form of equity capture is when you "add value" to a property. You buy a house for $50,000 that is run-down and dated, and invest $40,000 in modernizing and repairing it. Now you can sell it for $125,000, which means that you stand to make $35,000 profit. You have "added" or "forced" equity. This strategy is much more accessible for new investors, and can either be a "fix-and-flip", a house you buy specifically to repair and sell right away, or in a "live-in-flip", a house you fix up while living in it. The best option for this is to do it with your first home because you can get a Federal Housing Administration (FHA) 203(k) loan that lets you buy the house with 3.5% down and includes additional funds to do the repairs.

7. The House Hack

Many properties and lifestyles are perfectly suited to house-hacking: you live in the property and rent out other rooms or units to tenants. For singles, this can be as simple as renting out rooms to friends and collecting rent from them; for families, the best and most common options are to buy a duplex or triplex, living in one unit and renting the others. In most cases involving house hacks, the rent you collect will just about cover the mortgage. When you move out and add another tenant, that will provide cash flow.

When looking for a home, try scouting properties that have multiple buildings but that aren't being marketed as a duplex or triplex. Things like mother-in-law suites or Accessory Dwelling Units (ADUs) are more popular than you might think, and totally legal. In fact, many homeowners will use such extra buildings as workshops or home offices, but you can convert them into rental units (even AirBnB units) and take a property that no one thought could be house-hacked and turn it into a cash-flowing investment!

The Military (Unfair) Advantage

At this point, we've just about exhausted the paths to profit for the typical investor. But you're in the military, which means you have more and better options that can increase your Cash Flow and your ROI.

8. The VA Loan, Part 1

Back in #1 we explained that your ROI is your appreciation multiplied by leverage. The average investor uses 20% down, or 5:1 leverage, but with the VA Loan you can buy a property for 10%, 5%, or 0% down with no extra hoops to jump through. If you recall our ROI formula, you'll realize that these leverage ratios of 10:1, 20:1, and Infinite will supercharge your profits. With 10:1 leverage, you make an ROI of 35%, with 20:1 your ROI becomes 70%, and with a zero-down VA Loan you get infinite ROI, aka Free Money.

9. The VA Loan, Part 2

Because the VA guarantees 25% of your loan to the banks, the banks are even happier with a VA Loan than with a conventional 20% down payment loan. Because 25% is more than 20%, they have less risk of loss. So they give lower interest rates, typically 1/4-point lower than what conventional borrowers get. For the Norfolk home we purchased in this post, that will earn you about $500 extra cash flow each year thanks to your lower interest rate and monthly mortgage payment.

10. Basic Allowance for Housing (BAH)

Unlike everyone else in America, you receive a tax-free entitlement that is based on the average cost of housing in your area. Most service members find themselves in the 12% tax bracket even though they earn enough to be taxed at the next higher bracket if BAH was included. That means you should be getting taxed at 22%, and that you should have to budget to pay your mortgage with after-tax dollars. If you have a $2,000 mortgage as a civilian, you'd need to make $2,564 per month just to have $2,000 left over after paying your Federal Income Tax (yes, you'd actually need to earn at least $2,842 because of Social Security and Medicare taxes). But in the military you get $2,000 and can put it straight into your real estate investment: you can get far more with the same or less income thanks to your tax-advantaged BAH!

11.Automatic Rent Growth

Rent growth isn't guaranteed, and during recessions rents often fall -- in ordinary markets and cities. But the Federal Government made their own law that the Basic Allowance for Housing (BAH) is adjusted by surveys from military families. As their cost of living increases, BAH goes up for everyone. And when you're in a military community you know how much everyone gets for BAH. For this reason, rent pricing in military towns is consistent, competitive, and predictable: every landlord knows that O-4s get $2,700 a month and set their monthly rent close to $2,700. When BAH goes up, usually 2.5-5% per year, landlords just look up the new BAH rates and raise rents. It's Uncle Sam helping you to make more profit!

12. Free Property Management and Collections

Most property owners who move to new cities don't leave behind a network of friends and colleagues, and have few options to watch over their property. So they hire a Property Manager (PM). Most PMs charge 10% of your monthly rent to do almost nothing: they enroll your tenant in autopay to collect rent, then direct debit 90% of that to you. In Norfolk you would be giving up $210 per month, enough that you would no longer have profitable cash flow.

But in the military, you leave behind trusted friends and have a close network of people who can assist you with PM duties if you need them. You can use Apartments.com or Zillow.com to advertise, screen, and rent your property, and then to collect rent. All for free. Then if there is a maintenance or other issue, you can call your network and have a friend swing by the property. Even if you pay them $50 to check in on the tenants, you've saved $210 a month. It's a no-brainer.

Beyond that, if your military tenants fall behind on rent, you can contact their unit and the unit will submit an allotment through MyPay to DFAS. The military will take care of docking their pay to make sure you get your rent -- and if they really can't pay, the military law system will quickly and painlessly enforce any eviction notices without concern over squatting. In other words, the UCMJ has your back.

 Conclusion

When it comes to real estate, the ways to make money make it an unbeatable asset class. Just using our example in this post with a 10% down payment (rounded to $30,000) for a $280,000 house with a $1,750 monthly mortgage that can rent for $2,100 a month, you can see just how great it can be:

• ROI: 10:1 leverage on 3.5% appreciation = 35% ROI
• Cash Flow: $1,200 per year on $30,000 invested = 4% ROI
• Amortization: $30,000 gained over 8 years on $30,000 invested = 9% annualized ROI
• Tax advantage: $10,000 deducted at 12% tax rate is $1,200 tax saved on $30,000 invested = 4% ROI
• Inflation profit = inflation rate = 3.1%
• Total ROI = 55.1%

When you add in the unique benefits available to those of us in the military through tax-free BAH, low- or no-down payment VA Loan options, lower interest rates, and network effects such as not needing to pay for property management, your ROI will increase by another 20%+!

If you want to learn more about real estate and investing and how to evaluate potential investments for cash flow, appreciation, and profitability, the Military Wealth Coach is here to help. You can easily schedule an hour-long one-on-one coaching session by clicking HERE.