Air Force guy in Washington D.C.

[Quentin Yip]

Hey everyone,

My name is Quentin Yip and I'm an Air Force Captain that's been in the D.C. area for about 8 months.  I have rented since I graduated college and am looking to potentially purchase a home in a year or so. 

My main goals for real estate is to first buy a home for me and my wife and then eventually branch out to own rental properties for additional income.  My main concern being in the military is the uncertainty of how long I am at any given location and where I'll be in 3-4 years.  I joined BiggerPockets.com after reading about your site in many different sites including reddit and Mr. Money Mustache. 

I'm looking for this forum's expertise to accomplish both my goals. My time horizon is pretty long so I am very willing to play the long-term game. My first question to everyone is whether I should stop my retirement saving in order to build up a down payment for a house? I have maxed out my Roth TSP for the last 2 years and have also maxed Roth IRA for several years. Is saving a down payment worth potentially losing out on big compounding gains in the future? Thanks everyone and look forward to your input.

-Quentin

[Robert Leonard]

@Quentin Yip Sir, I think you are smart to think long term in your investing, that's part of any good investment strategy.  I'll go over a few general long term investing ideas and then get to real estate.

I never participated in the TSP for a few reasons. When it first started about 15 years into my career, it had limited investment options that could take anywhere from 15-45 days to make any changes in investment allocation. That was too slow to be acceptable. There's no match for the military TSP like in the other government employees' TSP. That Roth TSP wasn't an option, unless it came up shortly before I retired and wasn't considering any such options?

Whether or not you use the Roth TSP or the regular (tax deferred) TSP should be weighed based on your overall tax situation. You said you are married, and with your combined incomes, are you accepting taxation in a higher bracket on what you are putting into the TSP? For 2014, if your combined incomes exceed 82,250, you could save the 25% tax on your TSP contribution if you used the regular (not Roth) TSP. I'll give you a military only option to make that a huge winner for you in a minute. You have to do the math and make your decision what's the best option.

Now for the military only retirement saving investment opportunity!  When/if you deploy to a combat zone or other hazardous duty assignment area where your military income is tax free, that presents an excellent opportunity to convert any nonRoth retirement saving to Roth during a year that you have lower income and are thereby in a lower tax bracket.  If you deploy for 6-9 months out of a year and only 3-6 months of your income for that year are taxable, you can convert some of your retirement savings to Roth without taking the tax hit that you would if you made that conversion during a year that you had your normal taxable income level.  So, depending on your income level now, you may be able to take the tax deferral investment options in anticipation of a tax advantaged situation like a deployment that will likely happen.  Ask me how I know this. ;-)

On to real estate.  The decision to buy or rent is market specific.  There are markets where owning is much more expensive than renting and I would expect it to be difficult to get positive cash flow in those high cost areas if you bought and then try to convert that property to a rental.  It has to be judged on a case by case basis.  If the cost of owning is very high, I would look at renting at lower cost levels as an opportunity to sack away more into your long term savings/investment cash reserves.  It took a conscious effort, but I always lived below my means in regard to what the housing allowance was for my pay grade and I never spent more than 75% of my housing allowance even while in Monterey, CA.  It will take some sacrifice and determination to scour the market and only take the right place at the right price for your plan.

CSM (RET) Robert Leonard