091 | Rich Carey Real Estate | Building a Rental Real Estate Snowball Machine without Debt

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Rich Carey, officer in the U.S. Air Force, talks about learning to live frugally, buying his first townhouse, and building his real estate empire from one to 20 houses in Montgomery, AL.

  • How did Rich get interested in financial independence?
  • What did Rich’s frugal life look like before he found financial independence?
  • How did Rich’s wife inspire their frugal living?
  • Rich and his wife paid off their mortgage in seven years.
  • Why did Rich have so much student loan debt as a military officer?
  • How quickly did Rich’s mindset change after he began dating his wife?
  • When did Rich and his wife purchase their first rental property?
  • House hacking runs deep in Rich’s family – how did his grandmother get him interested in house hacking?
  • How many homes does Rich currently own and rent?
  • How did Rich come to own these properties, and how did he pay for them?
  • How much savings were Rich and his wife able to use for paying off their mortgage?
  • Did Rich opt to pay off his mortgage as his sole investment, or did he also contribute to his retirement accounts?
  • Rich didn’t purchase any other houses until his initial mortgage was paid off.
  • How does appreciation work?
  • How to get from one house to 20 houses…
  • What is a price-to-rent ratio and the 1% rule, and why did Rich decide to invest in Montgomery, Alabama?
  • Are there deals to be found in the MLS?
  • What are the advantages of purchasing a house with cash?
  • Smaller, less-populated and less-advertised cities inside the U.S. more likely to offer deals that fit into the 1% rule.
  • Are Zillow, Trulia and other easily accessible online tools useful?
  • How involved is Rich in maintaining his properties, and why he did opt to use a property management company?
  • Building a strong relationship with his property management company gave Rich the opportunity to continue buying properties while living overseas.
  • Generally, someone can expect expenses to cost about 50% of the rent.
  • Rich owns 16 properties in an LLC, and the remaining four in are in IRAs.
  • What’s next for Rich and his family as he approaches 20 years in the military?

 

Links:

JL Collins Blog

Rich on Money

“Why You Need F-You Money” – JL Collins

 

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7 thoughts on “091 | Rich Carey Real Estate | Building a Rental Real Estate Snowball Machine without Debt

  1. Great episode! I was also relieved to find out that deals can be found on Zillow. I still prefer starting real estate investments in my area, so I’ll still probably hold off until the next downturn, but solid content for when that does happen.

    I was curious to find out how much Rich pays his property management company for overseeing rehab. I know he pays 10% for standard management, but would love to know what that extra service costs.

  2. They tack on 10% to their actual cost. I like it, because I noticed they are able to get better prices than I can, so this still results in a savings over what I would get if I supervised the work myself.

  3. Hey guys, great episode with Rich about Real estate investing, very educational. I apologize in advance for dropping a lot of math here, but it’s needed to explain this topic.
    I feel that an underrated/under-appreciated aspect of being active duty like Rich and myself is BAH, Basic Allowance for Housing.
    BAH is an allowance (not a pay, more on that later) that is given to active duty personnel not living in base housing. BAH varies based on rank, location, and whether or not the service member has dependents.
    For example, an E3 (Junior enlisted) with no dependents stationed in San Diego gets $2,022 a month ($24,264 annually) currently. An O5 (like Rich) with dependents (binary, no more money for 7 kids vice just a spouse) gets $3,609 a month ($43,308 annually).
    Those same two individuals stationed in Dayton, Ohio would get $888 monthly ($10656 annually) and $1,902 monthly ($22824 annually) respectively.

    Here is the key FI factor: BAH is an allowance and not a pay, so it is NOT TAXED at the local, state, or federal level. So an O5 like Rich (assuming he’s been in 18 years and is now an O5) is making just over $105,000 in taxable base pay per year and he’s in the 24% marginal tax bracket. If he lived in San Diego and his BAH was taxable, it would be an additional $43,308 a year taxed at 24% which would mean an additional $10,393 in federal taxes before any state or local taxes. His $43,308 in untaxed BAH is equivalent to $58,524 of taxable income.
    That E3 Junior enlisted servicemember gets paid about $24,624 annually. For junior enlisted servicemembers, their BAH can nearly double their functional annual income without adding to their tax burden!

    This is why BAH can help military personnel to crush the game through a couple paths:
    1. You have an allowance linked to inflation designed to cover the cost of rent plus utilities for your area for a modest living that is tax free IN ADDITION to a salary.
    2. If you buy a house you can be paying your mortgage with tax free money and then get a tax break for paying property taxes and interest on your property. Essentially get a tax break for spending tax free money, a double tax win!
    3. If you buy a house in a market that is stable to growing steadily, you can either sell it after your time there where your equity in the home has grown while being paid for with tax free money.
    4. If you buy a house you can do the usual house hacks of buying a multiplex or renting rooms in your house. This allows you to save more of the untaxed BAH money and invest it. If you invest untaxed BAH money into a ROTH it will never be taxed at any point!

    Obviously, there are potential pitfalls in real estate as has been widely covered on your podcast.
    From having been in for 10 years, I think that if you have a stable situation where you are in a stable to growing housing market for 3 years or more in the military, that it is probably a better idea financially to buy at or below your BAH level than to rent. BAH shortens the amount of time you have to be in a place to get to the break even point due to the previously mentioned tax benefits. If the break even on a house is usually 5 years, with BAH, I’ve calculated it out to be much closer to 3 years.

    My personal example:
    I was stationed in San Diego for 5 years. Bought a house when we moved there in 2011 that was just over my BAH. Due to a promotion and inflation, my BAH passed my mortgage after the 3rd year there. We sold the house for 28% more than we bought it for in 5 years after subtracting out all expenses, costs and fees associated with buying and selling the house.
    We also could have kept it and rented it out, but we were heading overseas and didn’t have Rich’s comfort level with being transoceanic landlords!

    I am sure there are others who will debate this and thats to be expected. All I know is that when we move next, we will have a nearly 30% down payment on a house in the budget range we plan to buy. That entire down payment is the the profits from the first house invested over time (we’re anticipating spending about twice as much on this next house as we did on the first house) with no added money. This has allowed us to take the money we would be saving for a house down payment and pay off student loans, max out the TSP and IRAs for both of us, buy cars with cash, and put money into 529s for our kids (which ever ones don’t use my GI Bill, another great financial benefit of military service) as well as have a taxable account with additional money for the house and any work that it may need when we do buy one.

    Thanks for all you guys do, keep up the great work!

    Dusty

  4. I have found success within a few hours drive from where I live to find solid rentals. You may not necessarily always need to look out of state, but just outside of the main city you are in if you are in a high priced area where 1% rules don’t exist. Don’t be afraid to search Craigslist as well. I’ve found my best ones there. But I use leverage with a 10% down portfolio lender which creates a huge cash on cash return.
    I would like to find out who his property manager is. I had already found a few in that area but finding a good property manager is more difficult than finding a good property.

    • That’s a good point Don. Craigslist can work, and you don’t have to look far sometimes. I’ve literally been asked 100’s of times who my property manager is. They are taking referrals.

  5. My oldest son is an O2. His savings rate is something like 60%. Military officers get paid well. My son is making over double what I’ve made as a police officer. Yet, I’ve lived frugal and have a small stock portfolio as well as 6 rental units, 1 triplex and 3 single family homes.

    If I made the money that Rich and my son make, odds are I’d have 20 plus homes and a million dollar stock portfolio.

    My point with this, is this. Even if you are making $25K a year, you can save a bit and start investing.

    If I can do it, you can do it.

    Jonathan and Brad, from listening to your podcasts, I think you have more than I do. I encourage you to learn from me and Rich. My annual return with individual stocks is over 17% a year since 2005. I’ve bought my 6 real estate units in the past 20 months or so.

    Stocks are easier than real estate, but real estate seems to have more potential to earn more.

    Oh, I do have mortgages on my rentals. I can’t afford to pay cash yet. My hope is to pay them down. I may need a few rentals in order to do this.

    Thanks for all of the great podcasts. Keep up the great work!

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