Investment Advice

Ok guys, here's a situational question for the more investment-savvy of you:

I want to purchase a strip mall in the next two to three years. It is going to be my retirement business, I retire from the Army in 5 years. My goal is to buy the place 2-3 years before I retire, and around a year out from my retirement, open up my tattoo shop (and possibly a cigar shop/lounge) in one (or two if I go with the cigar shop) of the rental units. From what I have researched, it looks like in the area I am looking (Killeen, TX), I can expect to net somewhere between $12-18,000 annually just from renting the units.

The Army has a program called the Retirement Redux Plan/Career Status Bonus. Basically, during my 15th year (which I am currently in), I can opt to receive a one-time lump sum of $30,000. Being overseas right now, this bonus would be tax-free. The downside is, it would reduce my retirement pay from 50% to 40% of my base pay. At age 62, the retirement pay would increase back to the 50% rate. At my current pay grade, my retirement pay would be $2,164 monthly at 50%, $1,731 at 40%. This does not factor in any medical pay I may receive, but there is no way to accurately predict how much that would be, so I'm not going to factor it in. This also does not account for any pay raises between now and when I retire, but that would, at most, only be a few hundred dollars, so its very unlikely that it would raise my monthly retirement by more than $100 or so.

My train of thought is that I should take the $30k, put it into a safe mutual fund until I ready to purchase the strip mall, and then use it as a down payment on the place. I'm sure I will need a decent amount down, hopefully only around the 10% mark. The properties I have looked at were around the $250-350k range. I can also start dropping all my income tax returns and whatever other money I can scrounge together into the investment, so hopefully I'd be looking at around $40k when I am ready to purchase the strip mall.

My question is, does this sound like a decent plan? I will be losing $433 a month for 288 months, assuming I live to 62. That is a total of $124,704. Of course, when you look at the total sum, its horrible math. However, it will allow me to make the purchase of the strip mall, and without the $30k up front, I don't believe I'd be able to do that. With the purchase of the strip mall, if I am able to net $12k a year, I stand to make $288k over that 288 months if I just rent out the units, that is not counting on making more than that from one or two of the units if I open my own businesses in them. Also, my main goal for my retirement check is to be able to pay my home mortgage, utilities, and insurance. I am very comfortable with $1,731 covering these expenses. So, does the loss of a guaranteed $124k, spread out over 24 years, justify the gain of $30k rolling it into a commercial property investment that could possibly make me $288k spread out over the same period of time?

Comments

  • The_KidThe_Kid Posts: 7,871 ✭✭✭
    Interesting,,,, sorry if I missed this but what age will you be when you retire from the service? 38?? edit does your mos offer re-enlistment bonuses?? also what happens if you take the 30k and discharge/seperate before retirement
  • alienmisprintalienmisprint Posts: 3,961
    The Kid:
    Interesting,,,, sorry if I missed this but what age will you be when you retire from the service? 38?? edit does your mos offer re-enlistment bonuses?? also what happens if you take the 30k and discharge/seperate before retirement

    Yep, 38. I am already indefinite, so that means no more reenlistments for me. The likelihood of my being seperated prior to my 20 years is extremely low. I'd basically have to do something illegal to be booted. But, if I did get seperated prior to reaching 18 years (at 18, unless you do something jail-worthy, they have to let you go to the full 20), I would have to pay back the bonus at a pro-rated amount.
  • The_KidThe_Kid Posts: 7,871 ✭✭✭
    alienmisprint:
    The Kid:
    Interesting,,,, sorry if I missed this but what age will you be when you retire from the service? 38?? edit does your mos offer re-enlistment bonuses?? also what happens if you take the 30k and discharge/seperate before retirement

    Yep, 38. I am already indefinite, so that means no more reenlistments for me. The likelihood of my being seperated prior to my 20 years is extremely low. I'd basically have to do something illegal to be booted. But, if I did get seperated prior to reaching 18 years (at 18, unless you do something jail-worthy, they have to let you go to the full 20), I would have to pay back the bonus at a pro-rated amount.
    k, just covering all contingencies. If you took the full amount and banked the extra 433 it would take 69 months to build up 30 k. Gonna think bout this. Normally I would opt for lump sums. I'm not sure., Whats the average rate of return on 30 k over 5 years? On the top of my head Im thinkin 12 k,,= 42k
  • alienmisprintalienmisprint Posts: 3,961
    I'm looking more at the possibility of making 12k a year, so about a 60k return over a 5 year period vs. 30k. On top of that, in the very long term, it is something I would be able to either a) sell when we reach full retirement and live life very well for our last few years, or b) leave to my children. Something that is guaranteed to make me money for the rest of my life, basically, vs. an extra $433 a month for 24 years. The main factor to me is the guaranteed $433 versus the possible $1k a month. Is the risk worth it? Like I said, I am comfortable with receiving $433 less a month on my retirement pay, as I am pretty confident I can get a house with a mortgage well enough under $1700 to have my retirement cover the mortgage and utilities at a minimum.
  • The_KidThe_Kid Posts: 7,871 ✭✭✭
    k, I may be confused,, are you saying that dropping 30k in a mutual fund for 5 years will net 60k? one more thing? does accepting the 30k disqualify you for any early out programs/offers that may be offered as you get closer to retirement?
  • alienmisprintalienmisprint Posts: 3,961
    The Kid:
    k, I may be confused,, are you saying that dropping 30k in a mutual fund for 5 years will net 60k? one more thing? does accepting the 30k disqualify you for any early out programs/offers that may be offered as you get closer to retirement?


    No, using the 30k as a down payment towards the strip mall. I stand to make between $12-18k a year on the strip mall. And yeah, if any other early out options came up after I took the 30k, I would either not be able to take them or have to pay back a prorated amount of the 30k.
  • perkinkeperkinke Posts: 1,575 ✭✭✭
    I'm not a money guy, but work on the outer edges of economic development. Have you checked the current retail space availability and the population/economic growth projections? In my town residential real estate is a great investment but commercial at the moment is still pretty depressed with lots of vacancies (partly because the owners won't reduce rent to match the market) and isn't expected to pick up soon.
  • alienmisprintalienmisprint Posts: 3,961
    I haven't done any research into the actual numbers; however, it is a booming military town. It is the town that supports Fort Hood, the largest Army base in the country. The town is currently growing, new houses being built at a crazy rate, new strip malls going up, restaurants, etc. I feel pretty confidant that there is plenty of commerce to support it.
  • Gray4linesGray4lines KentuckyPosts: 4,497 ✭✭✭✭✭
    I will try and do a quick calc. But I believe you nailed the "issue" already... is a guaranteed $433 a month extra until age 62 better than a possible $1000 profit from the biz. Given your confidence, sounds like the biz is worth more even with some uncertainty

    I will try and get a quick and dirty present value of that $124k so you can compare apples to apples...
    LLA - Lancero Lovers of America
  • Gray4linesGray4lines KentuckyPosts: 4,497 ✭✭✭✭✭
    If I understood correctly... if you take the $30,000, your retirement pay amount will be reduced from 50% to 40% for 24 years. This is a difference of $433 a month or $5,196 a year... Over 24 years the undiscounted amount is $124k and change.

    The discount rate needed to make the difference in retirement pay equal to the $30,000 lump sum is about 21%. What's this mean? It means that the gov't decided that for them to offer a lump sum, the appropriate rate of return on your retirement money is 21%.

    Another way to look at it: Adding up your full 50% retirement for 24 years gives a present value of $500,000... at 40% you get PV of $430,000 ($400,000 in monthly payments plus $30,000 lump sum) BUT if you add in the expected business revenue of about $15,000 per year (average of 12k to 18k), you get another $289,000. Keep in mind this does not include expenses!

    So, just taking the lump sum makes you much worse off... however, the expected return on the mall may very well outweigh the difference in the 50% vs. 40% In fact, if your expenses ate up 75% of your profit, you would still break even.

    I just ran this quickly, if you have any questions or suggestions, let me know!
    LLA - Lancero Lovers of America
  • SleevePlzSleevePlz Goodrich, MIPosts: 6,249 ✭✭✭✭
    Are you taking into consideration the payment on the 200-300K loan you are taking out for the property or is the 12K per year on top of the loan payment?
    LLA - Lancero Lovers of America
  • alienmisprintalienmisprint Posts: 3,961
    Gray4lines:
    If I understood correctly... if you take the $30,000, your retirement pay amount will be reduced from 50% to 40% for 24 years. This is a difference of $433 a month or $5,196 a year... Over 24 years the undiscounted amount is $124k and change.

    The discount rate needed to make the difference in retirement pay equal to the $30,000 lump sum is about 21%. What's this mean? It means that the gov't decided that for them to offer a lump sum, the appropriate rate of return on your retirement money is 21%.

    Another way to look at it: Adding up your full 50% retirement for 24 years gives a present value of $500,000... at 40% you get PV of $430,000 ($400,000 in monthly payments plus $30,000 lump sum) BUT if you add in the expected business revenue of about $15,000 per year (average of 12k to 18k), you get another $289,000. Keep in mind this does not include expenses!

    So, just taking the lump sum makes you much worse off... however, the expected return on the mall may very well outweigh the difference in the 50% vs. 40% In fact, if your expenses ate up 75% of your profit, you would still break even.

    I just ran this quickly, if you have any questions or suggestions, let me know!


    Thanks for the quick number crunch. It looks like pretty much exactly what I was thinking. There is obviously more risk involved with the investment into the strip mall, but its not really realistic to expect to make money with no risk involved. And on top of just the monetary gain, it gives me something to pass on to my kids and the ability to actually own the building that will house my business. I am going to have a tattoo shop, at the very minimum, when I retire. It would be a hell of alot cooler to actually own the building than have to pay lease on it. And, by the definition of a successful business, you have to make more profit than your rent costs, lol, so owning a business or two (or three if everything goes well for me) would increase the profit ratio, hopefully signifcantly.

    SleevePlz:
    Are you taking into consideration the payment on the 200-300K loan you are taking out for the property or is the 12K per year on top of the loan payment?


    The $12-18k is an estimated net profit of the place, after loan payments and other expenses. That estimate is only taking into account renting out the units, not actually owning any of the businesses in the strip mall. It is based off having 5-6 units to rent, average size retail locations within a strip mall. I did not estimate in vacancy rates, there is some risk there.
  • clearlysuspectclearlysuspect Jacksonville, FloridaPosts: 2,124 ✭✭✭✭
    Hey there brother! Haven't seen you in a while.

    You know I'm always around military bases as well. Live in a big military town in Jacksonville, FL and I still can't count the number of inop strip malls I see everywhere. I like the way you're thinking, but maybe you should just start with the cigar shop before swallowing the apple whole. If you can run the cigar shop successfully and still feel like you have some energy left, then think about buying the strip mall.
  • raisindotraisindot BostonPosts: 1,308 ✭✭✭
    Your situation would be a perfect case study for a finance class. You might want to think about seeing if a local college might want to take this on. Or, you might want to post the same scenario to a Linkedin group of real estate or finance professionals to get their views.

    As I work in the horrible investment industry, I tend to be a bit more inclined toward keeping your current income and not taking the lump sum. But, on the other hand, there are also advantages of owning property as well, some of which you mentioned.

    Some things you might want to consider as you're evaluating the strip mall purchase.

    1. Is the $12-$18K income projection net of costs, such as maintenance, insurance, etc.? Have you also accounted for potential loss of income or legal costs if you can't rent the spaces or tenants default?

    2. Does the success of the strip mall and your own businesses depend on the continuing military presence? What happens if the base closes (at some point, a large number of military bases will close, due to military cuts--we've lost a number of large bases up here in MA that no one ever thought would close. These closing have decimated local businesses that depended on them). That would not only crush your income but would drive down the value of the property as well.

    3. Did you see whether owning this strip mall offers certain tax benefits that might make it more economically advantageous to buy it, i.e., being able to deduct real estate taxes or mortgage interest?

    4. Not sure about your family situation, but you say at the moment that can live on the reduced income that would come from taking the lump sum. This might not be so true as kids get older.

    5. Have you project the realistic income you could make from the tattoo and cigar businesses? I would imagine both businesses require significantly high liability insurance packages, and the growing use of online cigar retailers is going to make it harder for B&Ms to stay profitable. Tattoo businesses depend on a younger demographic; if the base closes, or military cuts send fewer soldiers there, that might cut iyour profitability.

    6. And of course there're always competition. If other tattoo places or cigar stores open in your area, you may find your profit margins squeezed.

    This isn't mean to scare you away, only to throw some thoughts out there that you may or may not have already considered. Whatever you're learning, I would suggest that beyond what we say that you spend a little cash on talking to a financial advisor and/or lawyer who specializes in real estate purchases to get a more informed view of the risks vs. returns of this scenario. Good luck!
  • alienmisprintalienmisprint Posts: 3,961
    raisindot:
    Your situation would be a perfect case study for a finance class. You might want to think about seeing if a local college might want to take this on. Or, you might want to post the same scenario to a Linkedin group of real estate or finance professionals to get their views.

    As I work in the horrible investment industry, I tend to be a bit more inclined toward keeping your current income and not taking the lump sum. But, on the other hand, there are also advantages of owning property as well, some of which you mentioned.

    Some things you might want to consider as you're evaluating the strip mall purchase.

    1. Is the $12-$18K income projection net of costs, such as maintenance, insurance, etc.? Have you also accounted for potential loss of income or legal costs if you can't rent the spaces or tenants default?

    2. Does the success of the strip mall and your own businesses depend on the continuing military presence? What happens if the base closes (at some point, a large number of military bases will close, due to military cuts--we've lost a number of large bases up here in MA that no one ever thought would close. These closing have decimated local businesses that depended on them). That would not only crush your income but would drive down the value of the property as well.

    3. Did you see whether owning this strip mall offers certain tax benefits that might make it more economically advantageous to buy it, i.e., being able to deduct real estate taxes or mortgage interest?

    4. Not sure about your family situation, but you say at the moment that can live on the reduced income that would come from taking the lump sum. This might not be so true as kids get older.

    5. Have you project the realistic income you could make from the tattoo and cigar businesses? I would imagine both businesses require significantly high liability insurance packages, and the growing use of online cigar retailers is going to make it harder for B&Ms to stay profitable. Tattoo businesses depend on a younger demographic; if the base closes, or military cuts send fewer soldiers there, that might cut iyour profitability.

    6. And of course there're always competition. If other tattoo places or cigar stores open in your area, you may find your profit margins squeezed.

    This isn't mean to scare you away, only to throw some thoughts out there that you may or may not have already considered. Whatever you're learning, I would suggest that beyond what we say that you spend a little cash on talking to a financial advisor and/or lawyer who specializes in real estate purchases to get a more informed view of the risks vs. returns of this scenario. Good luck!


    1) The $12-18k is net profit, after estimated maintenance costs, insurance, etc

    2) It does. I understand what you mean, but Fort Hood is not going to close. If, on the very unlikely chance that it were to close, it will completely destroy the entire town. It is one of the risks of owning a business in a military town. The benefit is that as long as the base remains open, the area is effectively unaffected by economic changes. The downside is, if the base is closed or downsized significantly, you stand to lose everything. I am accepting those risks.

    3) I have not checked into any possible tax benefits yet.

    4) The family can't live on the reduced income alone. However, the reduced income will still cover my mortgage, utilities, and home insurance; which is all I want out of my retirement check anyways. My wife's job would allow for the rest of our living expenses, and hopefully whatever business I own will add additional income.

    5/6) The tattoo shop actually has a very low overhead. There are no liability insurance requirements, just an annual fee for licensing, utilities, and very minimal supply expenses. Competition is definitely an issue, but alot of that relies on skill of artists working there, word of mouth, and location. Even in a highly saturated area, a tattoo shop can remain profitable, so long as it puts out quality work. Again though, the military base is a key to this. Having a ready supply of 18-24 year olds with access to expendable income. As I said above, I am willing to accept the risk of the military town thing.

    The cigar shop is a bit different. There are only two other shops anywhere close to the base. Neither of them carry a good selection of cigars. One has a small lounge, really more of a living room. The other has a nice lounge with bar, but requires a high monthly fee to be a member. I believe I can offer a better shop, so hopefully win out by just having a better selection with a nicer, easier to access lounge. Also, money isn't my main goal with it, more of just something I would really love to do for my retirement. So long as the profit I make from it exceeds what I would be renting the unit out for, I'll be happy.


    Thanks for all the points you brought up. I want to get across too, that although the goal of any venture is obviously to make money, I have no aspirations of being rich. My main goal here is to have a business that I love while making enough additional income to supplement my retirement so that my family and I are able to live comfortably. I have been planning on just opening a tattoo shop for years now, and in speaking to my sister-in-law (she was a mortgage underwriter) for quite a while, the idea of just buying a strip mall came up. I had been planning on just leasing a place, but she has me convinced that owning my own building is the way to go.

    The strip mall idea came about because if I were to buy a single-unit building, it would only house my tattoo shop. The shop would have to immediately start making a decent profit in order to cover just the cost of the loan payment. If I go the strip mall route, I can (hopefully) use the payments of the units being rented out to cover the loan payment/insurance. I want to do this in the next 2-3 years, so I would still have my full Army income and my wife should be just about done with her Master's degree. We wouldn't need any additional income, so as long as the place breaks even for us for the first 2 years or so, we are okay.

    If I am able to maintain a cigar shop and tattoo shop and rent out the other units, I would be comfortable with the entire thing, rentals and both businesses, netting me around $20-30k a year. If it does better than that, awesome. If not, that's okay too, between the retirement pay and my wife's pay, we would still be able to live comfortably.
  • KriegKrieg Posts: 5,092 ✭✭✭
    Honestly, I would hire an proven Financial Advisor and CPA. All bases covered at that point.
  • jthanatosjthanatos Posts: 1,570 ✭✭
    Krieg:
    Honestly, I would hire an proven Financial Advisor and CPA. All bases covered at that point.
    This is probably the best advice. When dealing with so many variables and such a long term investment plan, paying a professional to help fully define the risks seems like a good idea.
  • jgibvjgibv John G.Posts: 9,262 ✭✭✭✭✭
    jthanatos:
    Krieg:
    Honestly, I would hire an proven Financial Advisor and CPA. All bases covered at that point.
    This is probably the best advice. When dealing with so many variables and such a long term investment plan, paying a professional to help fully define the risks seems like a good idea.
    x2


    Great advice all through this thread .... but man, strip malls/retail space scare me.
    Like everything else ---- location, location, location!
    IF it's in a great spot and if you can keep it filled with tenants you're all set (obviously), but there's sooo many "IFs" with retail.
    perkinke:
    Have you checked the current retail space availability and the population/economic growth projections? In my town residential real estate is a great investment but commercial at the moment is still pretty depressed with lots of vacancies (partly because the owners won't reduce rent to match the market) and isn't expected to pick up soon.
    ^^^THIS^^^
    Sounds like you've looked into it a little bit, but do your research on this one.


    * I have a new address as of 3/24/18 *

  • prosspross Posts: 874 ✭✭✭
    As someone who owns commercial property I can give you some advice.

    Always factor in at least a 10% ongoing vacancy factor, higher if in a depressed area.
    Anticipate unexpected expenses, because they will occur- I guarantee it.
    99% of commercial loans are variable rate loans requiring 20-25% down payment. Interest rates are artificially low right now, so when doing your calculations, allow for increased mortgage payments. They will increase.

    Good luck!
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