How to Help Military Families with Little Equity?

Question

Hello BP Team,

Throughout my decade long Military career I've seen dozens of friends unwillingly forced into the role of landlord or end up writing a check for thousands of dollars, $12,000 in one scenario, to sell their primary residence after they completed their service (ETS), retirement, or forced to move out of state (PCS)? Now that I have the REI mindset, I often think about how we can help these great Americans offload unwanted homes through creative approaches.

In most cases, they lived in the house for a short amount of time and used a VA loan with zero down. Needless to say, they have little equity and limited options. Most of them end up hiring a property manager and after monthly P&I and operating expenses they end up with negative cash flow with the hopes of breaking even years down the road.

As a new investor, I'm not very comfortable with the "option to" approach so I thought it would be appropriate to start a dialog that would highlight all options to best assist this very specific demographic. With all the experience and creativity the BP community has to offer I believe we can identify avenues that benefit both the investor and Service Member. If anyone is willing to share a specific example of a success story or provide recommendations it will be greatly appreciated.

Thanks in advance for your contributions!

John Murphy · Answer

Hi @Robert Shortsleeves. Vet here and I've used my VA entitlement many times. The situation you are describing sounds like it could be challenging as there are multiple factors at play.

If they are wanting to sell the property then one option would be to FSBO. With low equity from a 100% leveraged property I would imagine the 5-6% commission from an agent is where the thousands come from. Of course a lot depends on the property, location, length of ownership, etc.

@eric upchurch and his team wrote a book "Active Duty - Passive Income" that you should check out and hit Eric up for some creative ideas.

All the best!

Adam L. · Answer

As @Eric Upchurch mentioned, our sole purpose is to educate military members, veterans, and their families to help build passive income and financial freedom! So thank you to @Greg Scully and @John Murphy for the mention!

I will say this, I have seen MANY military members struggle with exactly what you are talking about and it all stemmed from a lack of understanding and education. There is NOTHING wrong with using your VA loan while on Active Duty so long as you are using it as an INVESTMENT tool not a "I am really tired of paying rent" tool. That is a sure fire way of disaster. With the proper understanding of how one should use their VA loan, one would make better decisions and then not be in the world of hurt signing a check for $12k+. OUCH!

I also love the way @Anthony R. stated the Joes should have a good financial understanding before they invest. This is SO true. A lot of military members are much happier coming back from the box ready to buy a new Corvette than they are investing in their financial future. Helping them understand why that is a bad idea is just the beginning.

Anyways, please come on over to our Facebook group, #startthespark group, and website for some awesome information. We are always looking to help and we are excited to do it!

Michael Glaspie · Answer

Hey Robert!!

A lot of good advice here. The guys out at ADPI are awesome and provide a lot of free insight.

One thing I have found useful is using your VA Loan to purchase foreclosures. We can have this conversation more in depth off line. But there are ways to do live in flips/house hacks with the VA loan on foreclosed properties. This allows you to get the best of both worlds, equity and cashflow.

Account Closed · Answer

Here’s my take on a VA Lon type situation.

The VA loan was created to allow a veteran to buy a home AFTER they finished their service in world war 2.

While I think it is a great program and allows people that normally wouldn’t be able to save for a 20% down payment it doesn’t teach people that it costs a lot of money to sell your home. Because sometimes situations are due to lack of education

OR

If you wanted to really help I suggest educating young military members with the downside of home ownership for a short period of time. Or lobby congress to pass a law that would assist military families that are forced to move (PCS) before a certain period of time.

Anthony R. · Answer

Also a vet here that has used his VA Loan for rentals.

I know this is an unpopular opinion given the company that we're in on this site. HOWEVER, just because it's unpopular doesn't make it less valid.

I always recommend that soldiers wait until they ETS to buy rental properties. The stresses of PCSing (which I've done), deploying to combat zones (which I've done) and having to support loved ones back home while out of the country (which I've done) are a lot. The last thing soldiers should be worrying about is rentals. Regardless if they hand them over to property management companies or not.

It's in my opinion, that soldiers should

• Pay down debt and keep it at zero while investing
• Put at least $10,000 in savings before investing
• Put as much money as they can into low cost index funds
• Upon ETS, sell off some or all of their index funds and buy real estate where ever they end up ETSing to

With this plan, the soldier learns to manage money in a healthy manner by keeping debt at zero, while also having a good emergency fund. They're also getting the benefits of investing without being tied to one spot. Finally, when they ETS, their rentals will be in arms reach if they buy them where they end up ETSing to.

Once again, just my opinion on the safest route for troops to go. This is what I did, and it worked out amazing. We just hit 14 units, all which I'm able to self manage and we have only the mortgages in debt.

Good luck

Greg Scully · Answer

One of my partners (Adam La Barr) is part of this group. They may have some suggestions for you.

Active Duty Passive Income

Shaun Futch · Answer

I can relate to your drive to help military families with little to no equity as they find themselves in a VA mortgage mess throughout their years of PCSing. When I was still a young butter bar second lieutenant in the Army my 1SG found himself in a bad situation. He had purchased a home in 2007 in Lacey WA just outside of Ft Lewis. The market crashed while we were deployed and that house that was purchased for $300,000 on a VA with 0% down was now appraised at $150,000 just when he had received PCS orders. At the time I was studying in Real Estate investing but still not quite sure I knew enough to push forward. My 1SG had heard me talking to my soldiers about the market and pulled me into his office for advice on whether to foreclose or try to get a short-sale. I reminded him that a foreclosure or short-sale (at the time) would take away his security clearance so neither would be good for him. I gave him the advice to just rent it out and wait for the market to turn around. He informed me that he was already trying to purchase a property at his next location but they would not allow him to get approved for his mortgage until this house’s mortgage was settled. I did some research and figured out that all VA mortgages are assumable. I presented him with the possibility of having me assume his mortgage under his VA entitlement. This would get him out from under his current mortgage with his security clearance intact and would give me a property with no down payment and no use of my own VA entitlement. It was a win-win for both of us. Now that the market has recovered that house is now well over the original purchase price and still continues to provide me with monthly cash flow.

I tried this tactic many more times to help other veteran families out of bad purchases where they had no equity. It is a great way for an investor to collect properties with no money down especially when the possibility of appreciation is there. This was a great concept, however I quickly realized the flaw in my system was that I was just incurring everyone else’s bad purchases when they bought with their heart and not their head. None of these properties were making 1% on rental cash flow and some were barely breaking even on mortgage payments. I quickly had to reevaluate my strategy as I had become so focused on helping other veterans I had now placed myself in over a million dollars in debt on a bunch of bad deals. I now try to coach Soldiers to only purchase 1% or better properties as each home purchase should go toward their rental portfolio with a healthy cash flow. If a Soldier is wanting to purchase a home with the expectation to sell when they PCS I will tell them to either purchase a renovation project that they can live in while rehabbing or I tell them just become a renter if they are unwilling to dip below the 1% rule.

Robert Shortsleeves · Answer

@Frankie Woods this is exactly the mindset we need. You made me realize I was thinking too small. militaryonesource.com is a great idea! I was going to shoot for inviting experienced investors and agents to unit functions like monthly Family Readiness Group (FRG) meetings and payday activities. @Shelby Osborne @Michael Glaspie @Adam L. are you aware of this sort of thing? We are all familiar with leadership attempting to educate troops about money management via the Financial Readiness Program (i.e. TSP, Roth IRA, consumer debt, credit score) but I never hear about the risk of a zero down VA loan. Often it feels like a check the block moment. I wounder if there is any data out there that highlights GIs in negative cash flow situations.

Adam L. · Answer

@Brandon Shortsleeves I would love to get into the FRGs and AFRCs I am near and discuss some of this stuff. No one teaches anything about the risks of VA loans but I hear people constantly saying they are losing money on the house from their last assignment. I would gladly go teach something like this and help people get through the nuances of buying a house with a VA loan.

Frankie Woods · Answer

Currently on active duty and have used the VA twice (i.e. ,maxed out the benefit). I have 28 units, and the VA has by FAR been the best lending vehicle I've come across.

I honestly think the biggest problem is education. These GIs don't completely understand the nuances of REI, and thus suffer from it. We, as experienced REI, need to change this.

IMHO, I believe we as a community should provide a resource to military members that explains, in plain english, strategies that would best help them in acquiring RE in a way that helps them on their path to FIRE. I don't think that resource currently exists (well biggerpockets obviously, but I'm thinking specific to military members). Think onesource.com.

This game isn't rocket science, but it definitely can be overwhelming to newbies. Let's help our family!

How to Help Military Families with Little Equity?

How to Help Military Families with Little Equity?

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