To Spend or to Save Passive Income from Real Estate?

Question

Hello Fellow BP Members!  I was hoping I could gain some insight from some experienced investors about some conflicting ideas in my head about what to do with passive income earned on real estate investments.  I was listening to a BP podcast this morning and one of the hosts made a comment about how he didn't start to change his spending habits until his passive income started to increase (spending on wants vs. needs... buying a bigger personal residence, buying a nicer car, going on better vacations).  Everything I've heard and read about getting your real estate investment portfolio going has stated that you should save your passive income for your next real estate investment.  So when does it make sense to start spending your passive income on yourself, particularly your "wants" in life?  To piggyback off that, I'd love any book recommendations regarding the accounting of real estate investments, specifically when and how you should pay yourself, based on what type of entity you have structured for your real estate investments.  I haven't made my first real estate purchase quite yet, but I'm currently saving to do so by the end of this year.  My goal is to get a 5-year timeline of when I can start reaping the benefits of having additional, spendable income.  Thanks for any and all comments, BP!

Pat L. · Answer

To spend or save or MAKE IT WORK FOR YOU !!!

When I started I applied everything extra against the existing mortgages. Most were owner holds without prepayment penalties so I paid them down hard to just give me breathing room as interest rates were double digits. Admittedly, the latter was one heck of an incentive!! But, I would just keep buying based on what the property would pay in rents.

What lifestyle??? There were many frugal years, no social life unless she could paint or drywall, junker cars & a company overtime meal diet of KFC etc. I was so busy rehabbing I'd even have KFC delivered.

But with 6 weeks vacation every year & a great paying JOB I could at least head to the Caribbean for 4-6 weeks of an all-inclusive. My colleagues were 'married with children' so had to take the summers off to be with their offspring & spouse, whereas I got stuck in the islands for winter vacations :)

Then one day you'll wake up & discover you're not only married to the perfect REI partner, but you're free & clear with a significant 'passive' cash flow that should/will continue to grow exponentially!!!

Good luck !!!

John Kedziora Jr · Answer

My goal is to not spend any income from my rentals until I have my reserves where I want them.

Then I will use the cash flow from my 2 rentals for the next down payment.

I will do this until I get to my desired income level. Every additional rental makes the next one faster.

Until then my 9-5 is my spending income.

Kenneth Garrett · Answer

@Abigail Gay

Your passive income is yours.  If your looking to scale up then I would save it and use it for the next investment.  Don't forget to keep 3-6 months of expenses for the unexpected repairs on your properties.

Andre Taylor · Answer

In terms of when to start paying yourself it falls back on your goals. Say for instance if you have a goal of 30 doors that produce you a positive cash flow of $10k then you wouldn't start spending until you reach that goal. It is different for every investor....so what is that magic number for you that will give you enough to have the lifestyle. As far as accounting books for real estate....there are books like " tax deductions for every landlaord, loopholes of real estate, etc"

David M. · Answer

@Abigail Gay

Hmmm... what sort of lifestyle you want to live is really up to you.  How you handle your money is up to your.  That’s like me telling you what to with your paycheck in my opinion

Not sure what you are asking....  you really never are “paying yourself.”  Unless you use a C Corp (which you might do for flips if you are really active), all the other entities are pass-through.  Your profits/losses are taxed regardless.

Read many of the discussion threads in BP or their blogs for more information on accounting and entities.  The latter there are 3 to 4 of this exact same question everyday just about...  or search to read some of the old ones.

Good luck

Sally Carr · Answer

Recently finished Rich Dad, Poor Dad. The author gives a basic idea about the structure of how to invest in assets that earn money for you. There is another book by him called Cash Flow Quadrant that goes into further detail. I would also look at this post: https://www.biggerpockets.com/forums/48/topics/733678-famous-four-podcast-answer-summary?page=1#p4320391

It shows the top books read by successful investors on the BP podcast.