A Military Retirement Plan: Rental Income

Includes: BXP, HCP, PSA, SPG, VNQ
by: Black Sail Research


We’ll look at how troops can use a VA Home Loan and BAH to purchase real estate for investment purposes.

Service members may have issues balancing their current duties and those of a landlord; we’ll explore the ins-and-outs of investing in REITs as an alternative.

A combination of REITs and rental properties can be a winning combination for those seeking stable passive income.

Welcome back to the Military Retirement Plan series! For those of you just joining us, feel free to catch up by checking out Part I, Part II, and Part III of the MRP. As the title suggests, I'll be discussing how to generate income through real estate.

I'd like to remind readers that despite focusing on the financial aspects of the military, that is not why I, or most soldiers choose to serve. The reasons may vary, and are often personal, so let's stay focused on finance. Also, please keep in mind that the content covered can seem like a foreign language to some. Readers may be in the military but lack financial knowledge, or may be fluent in financial languages, but lack basic understanding of military benefits. While this presents a unique opportunity to bring the two together, it also comes with its own challenges, so bear with me, and feel free to leave suggestions. With that, let's get started!


Service members are in a very unique position when it comes to real estate. Troops that are above the rank of E5 are typically permitted to move out of the barracks and into a home off post. The military, in keeping with its Maslow-esque hierarchy of needs, will pay soldiers a monthly stipend called Basic Allowance for Housing, or BAH. This stipend, in the words of the DoD, is "a U.S. based allowance prescribed by geographic duty location, pay grade, and dependency status. It provides uniformed Service members equitable housing compensation based on housing costs in local civilian housing markets within the United States when government quarters are not provided". Simply put, the DoD will tack additional pay on to a service member's paycheck that, in theory, will cover the average rent or mortgage payments for the area they're living in.

Service members can also take advantage of the VA Home Loan plan. VA loans are guaranteed by the Department of Veterans Affairs. Generally speaking, those that qualify may receive a loan for up to $417,000 before having to factor in a down payment. You read that right: no down payment necessary. There are a number of stipulations and requirements that we'll get to later in the article.

Why Rental Income?

It's a relatively easy way to generate monthly, rather than quarterly, income. Service members are also building equity rather than paying rent to a landlord. Further, rental income is considered passive income and in the eyes of the IRS, it is typically not subject to self-employment tax.

For those uncomfortable with the prospect of being a landlord, I recommend looking into Real Estate Investment Trusts, or REITs, which we'll cover further. A REIT is a company that owns or finances income-producing real estate. Due to their tax structure, these companies pay out all, or most of their taxable income in the form of dividends. While these dividends are taxable at the individual investor level, a savvy investor may hold them in a tax-sheltered account to avoid paying said taxes.

Some Options:

There are a number of REIT subsectors; industrial, office, retail, residential, medical and general infrastructure to name a few. After I complete further analysis of some of the prominent REITs, I can share some of my personal picks. For now, I've pulled up 4 mid- to large-cap REITs that operate in different sectors for you to gain an understanding of how these companies generate income:

  1. Simon Property Group, Inc. (NYSE:SPG) operates as a self-administered and self-managed real estate investment trust. It owns, develops and manages retail real estate properties which primarily consist of regional malls, premium outlets and mills. Simon Property Group specializes in the ownership, development, management, leasing, acquisition and expansion of income-producing retail real estate assets.
  2. Public Storage (NYSE:PSA) engages in the provision of storage units for personal, business, and vehicle needs. It operates through the following segments: Domestic Self-Storage, European Self-Storage, and Commercial. The Domestic Self-Storage segment acquires, develops, owns, and operates self-storage facilities which offers storage space for personal and business use. The European Self-Storage segment operates through its subsidiary, Shurgard Europe, which owns self-storage facilities in the Western Europe. The Commercial segment owns and operates rentable commercial spaces.
  3. Boston Properties, Inc. (NYSE:BXP) is a self-administered and self-managed real estate investment trust. It engages in the acquisition, development, financing, capital markets, construction management, property management, marketing, leasing, accounting, tax and legal services. Its property portfolio is comprised primarily of first-class office space, hotel, residential properties and retail properties which are concentrated in five markets: Boston, New York, Princeton, San Francisco and Washington, DC.
  4. HCP, Inc. (NYSE:HCP) is a real estate investment trust which invests primarily in real estate serving the healthcare industry in the U.S. The company acquires, develops, leases, sells and manages healthcare real estate and provides mortgage and other financing to healthcare providers. It operates through five segments: Senior Housing, Medical Office, Life Science, Post-Acute/Skilled Nursing and Hospital.

All data is derived from Seeking Alpha's "Key Data" tab.

If holding an individual REIT is still a little too risky for your appetite, consider a REIT Exchange-Traded Fund, or ETF. An ETF is a marketable security that typically tracks an index, commodity, or "basket" of assets similar to an index fund. Unlike mutual funds, ETFs trade as stocks on one of the exchanges. As with any investment, it is in the investors best interest to complete their own due diligence and consider the risks involved. To get a better idea of what an REIT ETF would look like, let's take a look at the Vanguard REIT Index ETF (NYSEARCA:VNQ):

Share Price: $83.08

Yield: 4.05%, $3.38 annual payment per share

Top 10 Holdings:

  • SPG 7.86% Simon Property Group Inc
  • PSA 3.89% Public Storage
  • PLD 3.29% Prologis Inc
  • HCN 3.23% Welltower Inc
  • EQIX 3.02% Equinix Inc
  • VTR 2.90% Ventas Inc
  • AVB 2.83% AvalonBay Communities Inc
  • EQR 2.80% Equity Residential
  • BXP 2.54% Boston Properties Inc
  • HCP 2.17% HCP Inc

Recognize some of those names? REIT ETFs can be a fantastic way to diversify; not only does the ETF hold multiple companies, but those companies have multiple rental income generating properties. If one property falls through, you're covered by the others.

But Is It Enough?

High yielding REITs are a great way to increase the income in your portfolio; however, there may be a better way. Service members may want to consider investing in real estate directly. Similar to any other investment, rental properties can be as risky or as conservative as desired. An individual may take a more hands off approach and flip houses, or assign contracts if they have a solid team and firm grasp on the industry. There are over 125,000 books listed on Amazon.com, and those interested should pick up a book on the basics. Others may be more interested in a hands on approach: buy a home, rent it, be an active landlord and keep it in your portfolio to generate predictable, monthly income.

The VA Home Loan:

"Generally, you cannot use a VA home loan to buy investment real estate". Unfortunately, I think this shuts a lot of potential landlords down when completing their homework, but if they dive deeper, they'll find that there are always exceptions. While you cannot use the loan to intentionally buy a property to rent, you can purchase with the intent of living in it and renting in the future. Troops can also purchase up to a fourplex, live in one of the units and rent the rest. For service members, this is key. As we know, military personnel move frequently, but we can use this to our advantage. Here's how it's broken down:

  • Service Member is stationed at Ft. Benning, Georgia, for example.
  • SM is over the rank of E5 or has a family and subsequently qualifies for off-post-housing.
  • SM then uses a VA backed loan to purchase a home (under $417,000) and pays no down payment if they choose.
  • SM then uses their monthly Basic Allowance for Housing to pay the mortgage until they are reassigned to a new duty station. They are now free to find a new home and rent their current.
  • SM locates a renter (preferably another SM), sets the rent at a reasonable rate above the mortgage payment and collects the monthly rent. We're not out to hammer fellow service men and women, so It would be in the renter's best interest to set the rent at the area average.
  • The SM now has their mortgage paid by a reliable renter, is making a profit from the premium charged over the mortgage and can still use the BAH to live in another house at their new duty station.

Sounds like a sweet deal, but it gets better: the VA Home Loan is not a one shot deal; that's right, there is no limit on how many times a SM can use the VA Home Loan. The service member is not required to sell their current home to move up and out. It's foolish to assume troops will remain in the same home for the rest of their lives. The SM may get married, have children, be relocated to a new duty station, or find that their current home doesn't meet their needs anymore. To combat this, the VA Home Loan is structured in a way that a SM can use it again to find their next home without having to sell their current home. This helps with stability and for the financially savvy: produce income from a second rental.

We've Only Scratched The Surface:

Now that we've got the basics out of the way, look out for A Military Retirement Plan: Rental Income, Part II. We'll look at REITs and some of the key metrics involved in valuing them. In keeping with the purpose of these articles, I'll put together a potential real estate investment plan that includes REITs, and rental properties that any service member can modify to their needs. I'll also tie my plan in to keep the MRP on track.

As usual, I'm looking to hear from you. This is a place to learn and share ideas, so please do so. If you know any troops that may benefit from this forum, encourage them to check out the articles and join the conversation!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.