TSP or Rental Properties?
Real Estate Investor · Raeford, NC · Member since 2014 · 137 posts · 39 votes
TSP or Rental Properties?
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Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
10yI do both. I max out my traditional TSP (due to my tax bracket it makes sense) every year and also invest in real estate. Last time I got promoted, I continued to live like I was at my old rank and dumped the rest of my income into retirement accounts and real estate savings. The other thing I did was take a $50k TSP loan and used that to help fund another rental property. I pay that back each month with interest back into my TSP. And, since the market has dropped since then, every month I buy shares cheaper than I got them loaned out to me. That is just a benefit of the timing for me and wasn't planned. When I leave the military I will be able to self direct that TSP (401k basically) into real estate if I like.
I also have a self directed ROTH IRA that I use for real estate investing. I rolled that over from Vanguard index funds last year and have been lending with it for the last year. You could also buy rental property with it like you said and it will in fact be tax free money.
I would suggest all of you get away from USAA investments and move your money to a low cost index fund if you will keep it in the market. Read a book call the Boglehead's Guide to Investing and use that 3 fund strategy. Very easy to do and very low fees!
I have tilted more toward real estate over the last few years and am very happy that I can add the value to see big returns. But, it is active investing where the other half of my portfolio is not.
Good luck and feel free to reach out to me if you have any specific questions or need some support. I am not a CFP or CFA, just a guy who takes his finances very seriously.
28 Replies
- Investor · Kansas City, MO · Member since 2013 · 465 posts · 170 votes10y
Personally the 4% the TSP offers is trash considering the returns you can make in RealEstate. My old CO I used to think was crazy. He lived off base in a $800/month apartment in San Diego. His income from his rentals was more than his base pay. We spoke one day when I was driving him out to 29palms. He got me started on actually investigating real estate. Without that 3 hour long conversation I would have probably still been running in the rat race with no idea how to get out of it.
Now don't get me wrong, I still think diversification is a good thing when it comes to having income from investments, but real estate is where I'm sinking my money and effort into for the next 10 years. - Rental Property Investor · The Woodlands, TX · Member since 2014 · 345 posts · 288 votes10y
I was in the TSP while employed and loved it. Even though the military version of the TSP doesn't provide a matching portion (is that correct?), I do believe you have a Roth TSP option????
My advice is to take advantage of as much Roth investing as you can handle and then save all additional funds possible for real estate investing.... Time is your friend with all investment strategies, so do as much as you can as early as you can.... postpone some of the personal "wants" until you have built a strong rental portfolio (if that is your investing focus) to provide steady income that surpasses your base pay. Take advantage of all the benefits available to military members .... including VA loans.... but make sure you buy below retail with plenty of equity.
jeff
- Cape May, NJ · Member since 2015 · 23 posts · 3 votes10y
Diversify. In the militery your base pay is crap I know this because mine was. So for 5 years I put in 5% of Base pay and left the military with a whopping 5,000 in my TSP. So I would say to put away more than that. My current employer will match up to 5% so it would be silly not to contribute at least that. I wish the militery would match as well. Now from the little bit of research I've done lately on tsp the g fund went up a little over 1% the best performing fund went up somewhere around 4% so if you fallow the market close enough to know what fund you need to be in its not going to be an earth shattering return. I fallow TSP Alocation guide. That's guy who follows the market and blogs about it.
Another strategy I've heard of is use your TSP as a bank account of sorts and self finance. Save up a lump sum. Take a TSP loan to buy a long term buy and hold "you must live in a militery town so I know there's a bunch of E4s/E5s running around with a BAH check willing to drop that amount on a rental so you know your market is at least the local BAH amount" you pay the loan back from your base pay and you pay your self about a percent and a half on that loan while receiving rent from your property.
- Rental Property Investor · Northville, MI · Member since 2013 · 263 posts · 183 votes10y
My wife is only now considering tapering off full funding of our 401ks now that she's seen the success we've had in real estate. We could have gotten bigger sooner in RE if she'd been more comfortable with RE, but the upside is we're now firmly invested in both sectors. At least in our case it required thrifty living to be able to invest in both 401k and RE, but the payoff should be a very comfortable retirement.
- Real Estate Investor · Raeford, NC · Member since 2014 · 137 posts · 39 votes10y
Well currently I invest in the ROTH IRA through USAA and I max that out at 11,000 a year (5500 for me, and 5500 for my wife). I am getting promoted this month to CPT and I will have about 1100 more extra dollars laying around. I was pondering putting that cash in the TSP, or saving it up for 12 months and then looking for another rental property to invest in.
The upside to the TSP is there are no headaches, you put your money in there and thats it. WIth Rentals, Im dealing with A/Cs, Maintenance, late tenants etc. What scares me is having properties in other states and I cant get to the tenants. I could let a property manager handle it, but Ive never went that route before. Just trying to see what you guys think....Thanks for all your replies.
- 10yRyan JacksonPro MemberRental Property Investor · Camarillo, CA · Member since 2014 · 80 posts · 18 votesIf you rely on the TSP you will have savings to draw on in retirement but it will not make you financially independent, at least not for my personal goals. I know people who have tried to use TSP funds for real estate purchases and it doesn't always work because someone else is still deciding what you can do with your money. Personally I would continue to save with the ROTH IRA and invest the rest in smart tangible real estate deals. Make sure the numbers support property management. I also know people who have bought a 3/2 every PCS in CONUS and their rental income is now larger thane their military pay. I plan on continuing to invest in my USAA ROTH IRA until it is large enough to move to a self directed IRA and purchase property with. I still have to research if there is a ROTH version. Imagine having several properties in a ROTH producing income that isn't taxable! Maybe it turns out to be too good to be true.
- Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes10y
I do both. I max out my traditional TSP (due to my tax bracket it makes sense) every year and also invest in real estate. Last time I got promoted, I continued to live like I was at my old rank and dumped the rest of my income into retirement accounts and real estate savings. The other thing I did was take a $50k TSP loan and used that to help fund another rental property. I pay that back each month with interest back into my TSP. And, since the market has dropped since then, every month I buy shares cheaper than I got them loaned out to me. That is just a benefit of the timing for me and wasn't planned. When I leave the military I will be able to self direct that TSP (401k basically) into real estate if I like.
I also have a self directed ROTH IRA that I use for real estate investing. I rolled that over from Vanguard index funds last year and have been lending with it for the last year. You could also buy rental property with it like you said and it will in fact be tax free money.
I would suggest all of you get away from USAA investments and move your money to a low cost index fund if you will keep it in the market. Read a book call the Boglehead's Guide to Investing and use that 3 fund strategy. Very easy to do and very low fees!
I have tilted more toward real estate over the last few years and am very happy that I can add the value to see big returns. But, it is active investing where the other half of my portfolio is not.
Good luck and feel free to reach out to me if you have any specific questions or need some support. I am not a CFP or CFA, just a guy who takes his finances very seriously.
- 10yRyan JacksonPro MemberRental Property Investor · Camarillo, CA · Member since 2014 · 80 posts · 18 votes
@William Allen that is some great info! Do you know if you could lend to yourself from your IRA similar to the TSP? I never thought about doing the lending route until the IRA was built up for larger investments. May be worth it to loan a down payment to yourself and then pay yourself back at say a 10% interest rate. It would allow you to infuse more money into the IRA. That seems too easy and there is probably some regulation preventing it. Do you know a good source to learn about self directed IRAs other than searching these forums?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes10y
With disposable income, I would: 1) pay off any consumer debt, 2) Invest in any matching retirement accounts, 3) Fully fund ROTH IRAs, 4) Buy rentals. TSP or 457 money would be dead last. Good to be saving, but not a good medium, IMO. Deferring taxes or tax-deferred growth can be better accomplished in rentals with a better return. Good luck and thank you for your service @Chance Cooper!
- Rental Property Investor · Vienna, VA · Member since 2015 · 34 posts · 8 votes10y
@ChanceCooper
Chance,
First of all, nice job thinking like an investor, as a lot of people in the military don't think to invest at all.
I'm in the military as well (13 yrs), have a Roth IRA, Roth TSP, a couple investment properties in San Diego, and am currently looking to buy more.
A couple things to be aware of:
- I believe the new rules for active duty REQUIRE you to open a TSP account and make a minimum of 1% of base pay in contributions. This can be adjusted in mypay on the DFAS website. This is probably why your superiors are telling you that you have to open it. This is the military "looking out" for its people, despite themselves. For those of us who are savvy investors and would rather put their money elsewhere, this is frustrating, but understandable.
- Good job maxing out your Roth IRA before investing in the TSP. While the Roth IRA annual contribution limit is much lower than the Roth TSP's, you can always take out your contributions (what you put into it) from a Roth IRA penalty free, if you ever want to put that money to better use.
- With the TSP (Roth or conventional), you can take out a low-interest loan for the purchsae of a first property, but it is a loan - you have to pay it back. There is no way that I know of to take the money out, even contributions, free and clear until you're of retirement age.
- As you probably already know, if you're going to put money into the TSP, Roth IRA and Roth TSP make more sense for military than a conventional IRA or TSP, since our tax rates are so low (BAH is not taxed, since it is an allowance not a pay), especially if you are overseas in a tax free zone a lot. If you put tax free pay into your Roth IRA or Roth TSP, that pay AND its earnings will NEVER be taxed, which is awesome. Doesn't make sense to invest in conventional TSP or IRA if you are getting tax free pay - the prime benefit of those investment vehicles is tax deferral, and if you have no taxes to defer, why lock up that money? You're better off putting it in something more liquid.
- Also, DoD doesn't do matching TSP contributions for uniformed service members, so the Roth TSP is a better investment than the regular TSP (tax-deferred), just like a Roth IRA is better than a 401K that doesn't match contributions.
My strategy, for what it's worth: Like you, I contributed significantly to my Roth IRA and Roth TSP during the first 10 years of my career. Now that I'm turning my focus to real estate investing, I'm not contributing very much at all to those, and even plan to take some of my contributions out of my Roth IRA to invest in additional properties (there is a way to invest in real estate w/in your Roth IRA, but I don't want my investment earnings trapped in there until age 59 1/2, even if it is tax-free, because I want to retire sooner).
Taking money out of my Roth IRA kind of sketches me out, but if I could also take money out of my Roth TSP to put into real estate I would. But since it's stuck there, knowing it's there makes me feel better about taking money out of the Roth IRA.
Hope this was helpful.
- Investor · Albuquerque, NM · Member since 2015 · 20 posts · 13 votes10y
I've been in the military for almost ten years now and I would recommend the Roth TSP and the investment properties. You can use your VA loan for up to a 4-plex and take those cash flows and continue to roll it into real estate while putting money in both Roth's.
- Financial Advisor & Part Time Real Estate Investor · Wheeling, IL · Member since 2015 · 38 posts · 7 votes10yChance Cooper There are many considerations when deciding on one over the other. For example, your TSP does offer liquidity while real estate does not. Yes, real estate offers better profit/income potential than your TSP because you can control the deal. I've always recommended to my clients not to put all their eggs in one basket, although, personally, I would put a bulk into the real estate basket. In fact, if you structure your deals correctly they'll provide you with cash liquidity over time.
- 10yRyan JacksonPro MemberRental Property Investor · Camarillo, CA · Member since 2014 · 80 posts · 18 votes
@Christopher D.@Chance Cooper The new retirement will require contributions and some newer members will have the option to switch. Anyone currently on active duty is not required to contribute to TSP. If you have a superior telling you that go ask the JAG or command financial specialist. At first glance I would probably switch if I was eligible.
- Rental Property Investor · San Antonio, TX · Member since 2015 · 12 posts · 1 vote10y
Well, TSP made less than 2% last year. I stopped investing in it 2 years ago. Like a few people have said, it's good to use the TSP as proof that you have backup funds for 3-6 months for each property you own.
- Investor · Spokane, WA · Member since 2014 · 733 posts · 155 votes10y
@Chance Cooper, I have TSP & IRAs & Self Direct IRAs. I suggest a mixture...I max out my IRA contributions annually ($5500/ea for me & my wife). TSP is a 401k equivalent and has a $17k limit for annual contributions. Many advantages exist for investing with TSP (401k) because you can take out as much as 2 loans at a time (1 general & 1 for personal home). You can take out up to $50k or 50% of the account balance...check out www.TSP.gov and get educated on details on that. I took out a loan and used the Cash to invest in real estate over 1 yr ago.
The loan has 2% interest rate on it & interest goes back into my tsp acct so I am paying myself...the downside to taking a loan is if the market shot up I miss out on profits (but if it drops...like it has...i avoid losing as much $$$).
Loan payback for a general loan i think is 3-5 yrs and up to 10 yrs for a personal residence type loan.
What I am getting at is that you might want both TSP & IRAs. I use my TSP to invest in the market but when I am able to I take out a loan and use it to purchase real estate etc. My SDIRA is a Roth and I can make contributions during the year ...I invest my SDIRA in real estate and advantage is profits are all tax free since its a roth and I just roll it back in and move on.
- Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes10y
Originally posted by @Ryan Jackson:
@William Allen that is some great info! Do you know if you could lend to yourself from your IRA similar to the TSP? I never thought about doing the lending route until the IRA was built up for larger investments. May be worth it to loan a down payment to yourself and then pay yourself back at say a 10% interest rate. It would allow you to infuse more money into the IRA. That seems too easy and there is probably some regulation preventing it. Do you know a good source to learn about self directed IRAs other than searching these forums?
You can take contributions out of your Roth IRA but you can't get them back in it, which is why I never recommend that route. I believe there are ways to take a loan on an IRA for a house up to $10k but you really need to talk to a tax pro about that one, I don't know enough about it. There are prohibited transactions when you start talking about SDIRAs so make sure you research them well and speak to a pro. You can call any number of the SDIRA companies to get more information about them and this is also a good place to do some research. A savvy real estate CPA will have great advice as well. Ask some other investors you know who they use and if they are happy with the company.
@Bryan C. The max for a 401k / TSP contribution is $18k now so dump another thousand in there this year!
- Investor · Spokane, WA · Member since 2014 · 733 posts · 155 votes10y
Good info@William Allen.
- Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes10y
I don't want to get into whether people should or shouldn't invest in the market. However, the TSP offers the cheapest expense ratio known to market investors. So, if you want to invest in the market the TSP is a great way to do so and offers some great benefits to tap into your money for things like real estate easily. Every other investor using a market 401k would love to have the opportunity to invest in the TSP but they can't. But, if you are savvy in real estate and have the opportunity to self direct your 401k I say get after it.
- 10yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
BTW, we used a loan from our TSP to make a down-payment on a house. TSP has been a great tool, just like many other that the military has on offer.
We have saved tax-free income, hostile fire pay, family sep pay, and re-enlistment bonus payments...the "extra" pays, above the basic pay, to set aside. We have used the 10% savings account for those deployed. We used our BAH as we purchased properties, and used COLA to make improvements to our owner-occupied properties. And after bunches of properties, and 20-odd years in service, we finally used the VA entitlement to get into the current house. We have another VA entitlement to use in the near future (since both of us have been on active duty).
We have flipped, fixed and rented our way through our service years, and there will be a pension at the end of the road. And off topic a wee bit, we transferred the GI Bill to the kids, incurring a service-duty commitment, but shifting those expenses away.
These are all tools in the military toolbox; I don't think it is "either, or" but "both, and."
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes10y
I think this is very specific to the individual and their situation. Most Americans can not save money and invest it outside of a retirement account. They merely spend whatever is in their bank account. If this is you, definitely consider putting your money in a TSP.
I am easing back my retirement account contributions because I already have a sizable chunk of money in them, and I plan on retiring long before I could access these easily without tax penalty. So now most of my money either goes into real estate or a taxable brokerage account.
District Invest Group546 Reviews - Investor · Albuquerque, NM · Member since 2015 · 36 posts · 10 votes10y
I am not in the military but here are my two cents as a government employee. Now that I know that Real Estate Investing will allow me to retire early instead of waiting till I am 57 to touch my hypothetical $2.4 million investing in the TSP. ..I started using my TSP as my "savings account." I allow my TSP money to gain interest at a higher "savings interest rate" than the bank and will borrow from my TSP for either fixing a new rental property or for the down payment. I will then pay it back ASAP so that I can buy another property. I tried this strategy for the first time this past year and it is great!
The only drawback is having to take significant reductions on your paycheck due to me trying to pay back the loan quickly. I may just start paying my loan over 5 years (maximum allowed by TSP) so as to not have such a big deduction on my paycheck. The above strategy is really beneficial at a time like this. ..when the TSP funds are not doing well. By borrowing from my TSP in the current stock market condition I am getting a better cash-on-cash return on it due to the leverage I have in buying my rental properties. ..and I am paying myself 2% interest instead of a loan company.
I think the TSP is a great investment for people that just want to "set it and forget it" due to them not having the discipline to save on their own. I also agree with others regarding the notion of having diversification in the form of the TSP, outside Roth IRA's and real estate. I consider my real estate as being liquid compared to the TSP because I acquire cash flowing rental properties. This cash flow will be my bridge btwn when I retire early and when I can touch my TSP at 57.
- Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes10y
Look into transferring the ROTH TSP into a self-directed Roth IRA and then invest the ROTH IRA into real estate. A company that has been offering the self-directed Roth IRA since 1978 is IRA Services Trust Company.
- Realtor · Keystone Heights, FL · Member since 2015 · 340 posts · 118 votes10y
To the OP, how long have you been in the military? The DoD just recently announced a change to military retirement and depending on how long you've been in, you may have the option to use the new retirement system, which WILL include a matching TSP contribution.
As to the original question, TSP is a great program with lots to offer. Whether you should focus on real estate instead of your TSP is entirely up to you. But if you've got the option financially, I'd recommend maxing out your annual TSP contribution AND investing in real estate at the same time.
- Real Estate Investor · Raeford, NC · Member since 2014 · 137 posts · 39 votes10y
@Walter Key I am to far in to qualify for the new retirement. I will get the 20 year retirement. I think that you are right, maxing out the TSP while trying to do the real estate thing would be awesome.
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