Play Chess, Not Checkers: Investing While on Active Duty
There are hundreds of ways to begin investing in real estate while you are on active duty. Here is the route that has continued to work for me – with a few lessons along the way.
Start with a House Hack
You can use the VA loan for a property of four units or less. Find a place to live that works for you, and rent out the other units to subsidize your mortgage. The additional income allows you to begin saving for your next down payment immediately. Having a lease with your name as the property owner begins the seasoning process– banks like to see (~2 years) before lending on commercial property.
Landlord For a While – Yourself
Managing the property yourself will help you understand what to look for when you scale your business. It sucks – so do it until you learn enough to move on and don’t get caught up in the savings of self-management. Trust me; the savings do not outweigh the opportunity costs. A year is a reasonable goal, as this will give you a complete cycle on a lease.
Purchase Cash-flowing Properties and Focus on Economy-of-scale
Now that you have a tax return showing rental income, banks will be nicer to you. However much you have saved, multiply that number by 5 – this is the higher end of your price range. Search for properties that cash flow between 2-4 units. Go higher if you can; just know that commercial real estate and lending requirements change for five units and higher. You will need a higher down payment and likely more experience for banks to lend to you. All banks are different, and it certainly doesn’t hurt to try; just do your research and know what you are getting into with your investment.
Keep Buying Assets
Make it a goal to purchase AT LEAST one asset per year. Markets rise and fall – but the folks who survive crashes are the ones who bought for cash flow – not equity. Once you have enough cash flow to sustain you, you can begin targeting equity properties. This shift in mindset only makes sense when you simply store your value in the real estate market as a commodity – similar to gold. Higher-end properties tend to cashflow less but have fewer problems due to their highly rentable locations, quality of their build, and/or the tenants they attract: fewer problems, less cashflow, but higher equity gains when the market increases.
Work Your Way Up to Commercial Real Estate
In secondary and tertiary markets (think cities without an NFL team), 5-20 unit apartment complexes can be purchased as Joint Ventures or by wealthier individuals who understand real estate. 20-100 unit complexes are mostly purchased by newly established syndication teams raising money from groups of investors who focus on real estate. 100-250 unit complexes are the playground of serious syndicators who have established track records and the systems to handle large-scale operations. 250+ unit complexes often grab the attention of institutional money that will have enough money to make seemingly irrational purchases. It seems unreasonable to us as real estate investors, but keep in mind these folks are in a position to play the equity game. They are seeking to preserve capital (aka treat real estate like a commodity) and don’t expect the returns you will. Therefore, they can throw money at a stable asset and allow it to grow beyond the inflation rate.
What this all means for you:
Play chess, not checkers.
Develop your own strategy. Look at real estate opportunities as chess pieces.
- Smaller deals you can do by yourself are the pawns. They are a safe move to get your game started but take a long time to get across the board. To me, the best thing about a pawn is that the moment you move them, you open up opportunities to bring out the heavy hitters. Don’t forget about them though, when used correctly, you can get them across the board and level up into a better peace without paying the tax.
- Multi-family is your more dynamic piece. It’s a matter of scale. With relatively the same effort it takes to move a pawn, you can move these pieces across the entire board. Using these pieces takes a deeper level of strategy, and making the wrong move assumes a bit more risk. However, once you have a solid understanding of what you are doing – you can quickly become lethal.
- Your Relationships are the Queen. Through partnerships and networking, you can move in any and every direction you want to go. No matter what you want to do, the correct relationships can get you there. Relationships with other investors bring you ideas and sharpen your strategy. Relationships with lenders allow you to leverage capital to fuel your next big move. Relationships with brokers let you know what the other chess pieces are up to so you can position your team to take them down. Relationships, like the queen, give you agility across the board.
- The King is your Happiness. Never forget this. The only reason other chess pieces exist is to fight for and protect your happiness. Like in chess, it is easy to get caught up in winning individual battles while simultaneously losing the war. The moment you forget about your king – you’ve already lost the game. With every move, you should be thinking, is this aiding my happiness? Is the move I am about to make part of my strategy or part of my ego?
Written by: Ramsey Blankenship