I am new to investing, as I have bought my first 2 houses in the latter half of this year. I guess I didn't think this part of it through in detail before starting my new business, but, as stupid as this question may be, what do you do with the cashflow? I am netting about $700/month between the two properties and hoping to add a third by early next year, and I have caught myself wondering what to do with said net income i.e.,  do I pay myself a salary? Do I just let it sit in their respective accounts until I need it? Do I have to pay income tax if I cut a check to myself? Do I open another account to collect my cashflow in? I have no idea at this point, although I am leaning towards just letting it sit there for now. I guess I should ask my CPA, but since I've already spent the time to post this, I'd like to see what the BP community has to say...

I would use it to pay off debt or buy more property

@John Park Congrats on the two houses and welcome to BP.

Firstly, make sure you have some money available for repair reserves. Then, I would definitely reinvest in more property as soon as feasible. Of course, with $1400 a month it might take a while to earn enough for another down payment. In the meantime you could passively invest it on crowdfunding real estate platform, or partner with other investors. The money shouldn't be sitting in an account. Your money should be working for you bringing you more money.

100% of my business income goes to expanding my business. Between purchases I just hold it in a no risk savings account with moderate interest (1.20% Ally)

So, basically the 'left over' (cashflow) money does NOT have to be considered 'W2 Income' for lack of a better term. It can be utilized as capital without going through the 'tax wringer'?

Bank it , build up reserves . Something is gonna break , leak  or need repair . ( at the worst possible time )   

Your cash flow will be taxed at your normal taxable rate. However if you take all the deductions like depreciation and all other expenses you’ll likely show a rental income loss on your returns.

No tax advice given

@John Park , congratulations on purchasing two profitable properties. Regarding taxes, you will owe taxes on your net income. Income - property taxes - mortgage interest - depreciation - a host of other potential expenses is your net income. It's different than your cash flow which is the number that you see as your bank account balance grows. You should talk to your accountant so that they can give you an estimate of how much you will owe.

Regarding the cash flow, I would set aside funds for the repair work you know you need to do and a little extra for the unforeseen and put the rest into your next deal. For my 4-office commercial building, I like to keep $10k in the checking account to cover "emergency" expenses. All major systems and structural elements are up to date, so I'm not saving up for a furnace, roof, etc.

Keep up the good work!

@John Park
That’s a great position to be in. Congrats!
If the properties are owned under your personal name (not LLC or C Corp), and you have a mortgage against them, and you already have CapEx and vacancy reserves all set up, then that’s money you can spend. In terms of taxes, as someone already posted, only the ‘net’ portion will be taxable after you write off depreciation, expenses, mortgage interest and property tax. Usually you will not have any taxable income after that.
I think LLC is pass through income so should be similar.
Not sure about Corp. Definitely talk to your CPA.
Thanks.
Henry

Invest back into my business.. Sit with your CPA to discuss any potential tax implications but do what you want enjoy life!!

A huge congrats bro on your successful investments! Sounds like you are doing fine so far. You have to claim the entire gross amount you get for rent as income either way. Talk to a CPA to get the details worked out but all of it is considered income whether you touch it or not then expenses are taken out as deductions then you pay taxes on what is left. What you do with it has no effect on that part unless you do some things to the properties then some of it can be deducted as well. But that is a CPA discussion.

I would forget that the money is even there until you had at least $10K in an account for an emergency fund. Basically enough to cover your biggest ticket item which is usually HVAC given that the roof is covered by insurance and you would only pay your deductible for that. Nothing is worse than making smart decisions and having everything going great and cash flowing then having all those smart decisions be ripped away because you didn't have an emergency fund. The only thing we know for sure about your rental props is that something will break eventually. It would be folly to not plan for that before it happened!  

All of our cash flow is being set aside to FIRE, sometime next year, hopefully.

Sounds like you have two great properties, (if you have counted all expenses).  

I do not always have it, but I like to keep $2K per door in account, for the unexpected.  Example the deductible on a roof, a water heater, a c/ha unit, or vacancy issues.  

After I have that I would be saving for my next purchase.  Banks like to see skin in the game on a finance deal and you would be surprised what is available with a little cash on the courthouse steps, some of my best buys was because I was the only one there with cash.  

@John Park SAVE IT AS RESERVES! You never know when anything is going to happen always want to have backup. Its always there if you need it. Just let it keep building. When the times right put it into another property when u have enough to still have reserves.

All of my cash flow gets invested into more properties to continue increasing cash flow. I have a credit card I keep clear in case of emergencies.

A startup business does not pay wages.

If you are growing you put your cash flow to savings for your next purchase.

If you have completed your investment growth you can take a salary and funnel the excess into other investment vehicles such as a income fund. You need to diversify. To maximise your real estate income you keep your properties leveraged. There is no risk once your diversified investments are a sufficient safety net.

Leaving surplus cash as equity in properties is high risk due to market fluctuations. You do not want to be looking at retirement with all your properties underwater having lost half your cash equity. No other option but having to work till you die.

It all depends on your goals. How big do you want your business to get? If two is enough for you I guess pay yourself a salary as long as you have reserves to handle reserves. Personally I bank every penny because I want 100's of units some day. I'll never get there if I'm not disciplined.

@John Park , you have lots of advice John, reserves, use cash for more investments, emergency funds. When all those are funded, you can take whatever amount you want per month as a draw, the money can go towards whatever you want to put it into. Depending on how much you draw out, after expenses, your taxes should be very low. 

Unless you absolutely need it I would snowball it.

Congrats John.  I agree with the majority here, put the cash flow back in the business.  Good luck.

Originally posted by @John Park :

So, basically the 'left over' (cashflow) money does NOT have to be considered 'W2 Income' for lack of a better term. It can be utilized as capital without going through the 'tax wringer'?

 No, it is income and will be taxed at your marginal tax rate.   If you make too much in your investments, you will ether have to have extra withheld from your W-2 job, or make interim anticipated tax payments 4 times a year.  If you do not have enough withheld, you will penalized by the IRS.   Welcome to the  war on wealth in the US.

This is what we do. Our apartment building cash flows $4K a month. We are in the 25% tax bracket. We pull $3K a month out of owner's equity account (LLC), and transfer those funds to a non-LLC money market account. Of that $3K, we disperse 75% to the owners to spend as they wish, 25% stays in the account to pay the required quarterly tax payments.

Each year, our CPA estimates what taxes we will owe for the coming year (based on anticipated earnings) and tells us how much we need to pay each quarter.  Our CPA provides the forms to send in, we write a check and send the money.

When we do our 2017 taxes, we will either use the balance in the owner's money market account to pay any extra into the IRS (we usually owe a bit), or bonus the owners. 

Save it for emergency fund/repairs and ultimately to put into your next property. Park it in a high interest savings account. I have insight and consumers credit. There are some hoops to jump through with the latter but you can get 4.59 apr on up to 20k with no risk of losing your capital.

https://www.doctorofcredit.com/high-interest-savings-to-get/

I put a portion aside for reserves and the rest go towards the next purchase.

This is an interesting question, one that my wife and I had when we started last year. 

Since we aren’t dependent on the money gerenerated by our investment, we use all the cash flow towards principle only when we pay the mortgage with the highest interest rate. We came to this when we were looking at the amortization for our mortgage. Figured the faster we paid off the loan, the more we could save by paying less interests. 

If you were to follow the same path, be sure to calculate the costs of some major repair and have that sitting in your bank account just in case. 

Hi @John Park

Here is what I do with my cashflow. In order for this to work, you need to have an interest only heloc or some sort of a credit line. 

It doesn't matter what's the interest rate of your credit line, of course the lower the better but it works with almost any interest rate being offered in the market nowadays. 

Also make sure to park your monthly cashflow and any earned income checks in your credit line for maximum benefits and interest saving.

Your are netting $700/month ($8,400/year) so you can take $8,400 from your heloc or credit line and pay that chunk of money towards your mortgage balance. When you apply a lump sum payment towards your mortgage balance, you shave off tens of thousands in interest and you accelerate paying off your mortgage.

Don't worry if your heloc interest rate is higher than your mortgage interest rate. Your heloc is simple interest which is calculated daily. When you park all your checks and income in your heloc, the interest you pay on your heloc is nothing compared to how much INTEREST and TIME you save on your mortgage.

This doesn't work with everyone. but it makes total sense for people with good money management skills.