How To Pay Yourself From Your Properties

New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes

Perhaps this isn't the right place to ask this, but in the most innocent way possible I am curious as to how people who have quit their jobs in order to pursue investing as a full time gig make money. Basically anything I've read states that you have to keep your money separate from the properties or any personal assets can become a liability and at a risk of loss. If you are creating an LLC for your investments, how does one (eventually) use the income made on investments as personal finance without blending the two? If not operating or investing under an LLC, how do you prevent your personal assets from the risk of potential lawsuits?

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

You get “paid” automatically....the llc is disregarded as far as taxes go, so you’re paying tax on any profits anyway, you simply take the distribution...no need to “pay yourself a salary” as that turns passive income into active income, with ss/med taxes getting added in.

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Cameron TopePro Member
Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Cody Malave - great questions!
Note: I'm not a real estate attorney.
If you want to take money out of the LLC you can either borrow from the company or pay yourself a salary.
Yes, you need to keep business assets and transactions separate from your personal matters. Otherwise you run the risk of "piercing the corporate veil" and the LLC is worthless.
One thing, how many properties do you currently have? What's the value of all your assets?
When you start you might have one rental and it has a lot of leverage, meaning you have little exposure and minimal risk (especially if you're an ethical landlord that follows the local property code).
Attorney's will try to scare you into getting a complex structure but I wouldn't worry about it until you have something people can take. I didn't have the rentals in LLCs until after I owned 10.
Best of luck!
[email protected]832-770-7090
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Cody Malave
OP
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
6y
@Cameron Tope I appreciate the information! I haven't actually acquired any properties yet.. just trying to cover all my bases before I jump in. I plan on househacking in the beginning to have a lower initial capital investment but I wasn't sure how that worked liability wise, particularly if I was doing it in an SFH instead of a multi. I suppose talking to an accountant would be my best bet?
3 Reply
Ryan Deasy
Lender · Farmington, CT · Member since 2015 · 542 posts · 321 votes
6y
@Cody Malave good question. i am not a CPA or attorney. i started "paying myself" a short while ago. i have LLCs for my properties and then a main management company. i self manage all my properties. just as i would pay a property manager, my main management company collects a % of rents each month. i then pay myself as an employee of that management company.
13 Reply
Cody Malave
OP
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
6y
@Ryan Deasy Do you have individual LLC's for each property? I wouldn't plan on paying myself until I had developed enough income for it to make sense. But I wasn't sure how investing personal money into the LLC (startup) worked. Especially if you're using say a HELOC from one rental to use as a down payment to acquire another/others. I feel like every question that gets answered causes me to come up with two more!
4 Reply
Ryan Deasy
Lender · Farmington, CT · Member since 2015 · 542 posts · 321 votes
6y
@Cody Malave again i am not a cpa. i do not have an LLC for each only because that is too many LLCs. i do have a bank account for each. i did not pay myself one cent until now, 7 years after i started. you can ear mark a deposit like that as a "capital contribution". if you are putting post tax dollars or dollars that are from a loan (where you pay interest - HELOC or otherwise) that should not be an issue.
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Daniel HymanBusiness Member
CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
6y
Initial contributions from a personal bank account to an LLC account are typical. Similarly, periodic draws or distributions from the LLC to the personal account are typical.
When it comes to more complex transactions, its always best to loop in your tax pro.
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I K.
Yorba Linda, CA · Member since 2015 · 2 posts · 2 votes
6y
this is what I see from my customers: W2 yourself, take a distribution, take out a loan from your company

(if you have a commercial loan, this may be capped and be subordinated,

prob wont allow any principal pmt without permission, but you can give

yourself). Id talk to your tax guy for best option.
2 Reply
Cory LucasPro Member
Rental Property Investor · Brighton, IL · Member since 2019 · 431 posts · 139 votes
6y
@Cody Malave I too have yet to get in the game with a property, but your comment about answers to questions create more questions is a good thing I'd say, means you're heading in the right direction by taking action and educating yourself. Thanks for the post, good questions
2 Reply
Nick Barlow
Warsaw, IN · Member since 2017 · 229 posts · 270 votes
6y
@Cody Malave great question! I’ve been doing this for about two and a half years and haven’t “paid myself” yet. I see my experience ending up like @Ryan Deasy where I don’t distribute to myself for a few years. Learn all you can, but you’ll never know everything, and you’ll reach a point when the best education is simply to get started. Good luck!
4 Reply
Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y
You get “paid” automatically....the llc is disregarded as far as taxes go, so you’re paying tax on any profits anyway, you simply take the distribution...no need to “pay yourself a salary” as that turns passive income into active income, with ss/med taxes getting added in.
24 Reply
Stephen MahlerPro Member
Member since 2018 · 45 posts · 26 votes
6y
@Cody Malave
It may depend on how your entity is structured.
I have a llc taxed as a partnership (pass thru) entity.
I can make owner contributions and distributions any time for any reason. Just make sure you document properly.
4 Reply
Brandon Hicks
Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
6y
@Cody Malave
Wayne nailed it...I’m a full time buy and hold landlord and I pay myself whenever I need money. No set schedule. It’s a “member distribution” not a salary. The nice thing about being a landlord is that most, if not all of the money I pay myself is tax free due to depreciation. So my running joke is that I pay myself with money that the IRS says doesn’t even exist.
14 Reply
Cody Malave
OP
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
6y
@Brandon Hicks I suppose I definitely need to speak with a tax professional, because I have so many questions. However, I appreciate everyone's insight and experiences. It's been very helpful! This is a great community.
9 Reply
John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
This pay complexity only is an issue if you hold or operate your properties in an entity of some sort. We live on our rental income and don't have any entities in place. We take out our set asides which are taxes and insurance, and also capex. These are automatically deducted from our checking account and go into designated accounts. Then anything left over can be used to live on. It's simple and works for us.
4 Reply
Cody Malave
OP
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
6y
@John Teachout How do you protect yourself from a liability standpoint if something were to go wrong? Don't your personal assets (other properties, personal vehicles, etc.) become at risk during a lawsuit if something were to happen sans entity?
2 Reply
Robert Nelson
Member since 2019 · 43 posts · 20 votes
6y
@Cody Malave
How do you folks feel about an Umbrella Insurance policy instead of an LLC?
4 Reply
Cody Malave
OP
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
6y
@Robert Nelson Unfamiliar with it myself.
1 Reply
Fred Cannon
Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
6y
@Cody Malave. I have asked 3 CPA,s and 2 lawyers about setting up an LLC and have gotten the same answer. It doesn't give your personal assets complete protection and it doesn't give any more tax write off than you currently get. The advice is insurance coverage and meticulous record keeping from all 5 interviews. I keep separate ledgers for each rental, have one checking account and one savings account that I use for deposits. I have other income so I have a personal checking and savings as well. Set up a simple xcel sheet for each property with columns for different types of entries. I.e. rent, maintenance, replace (cap x ) taxes, insurance. Lawn care Etc. keep a log for travel expenses (over a year this can be a nice deduction at .55 a mile so don't miss out) My CPA loves my spreadsheets because everything is defined and all the totals are there for her. It's a simple system that catches everything. I pay taxes quarterly based on previous years totals. Settle up with the IRS in April and start again. I know some people have LLC's for each property and then a holding company for all their LLC's. I have six properties so not that big time and don't want all the extra record keeping and expenses. We are just mom and pop investors looking for retirement income and we feel good about providing nice housing for people who need it.
18 Reply
Mark Beeson
Rental Property Investor · Wichita, KS · Member since 2017 · 31 posts · 15 votes
6y
I jumped in about 4 years ago and try not to take anything out of my rental accounts. I will have 5 units if my current duplex deal goes thru. I keep $2500 in my account for each rental and feel I need to go to $3000. If HVAC, a roof or other item comes up, I don't have to worry about it.
I don't have individual LLC's as I understand no protection is afforded for personal liability - ask your accountant / lawyer for your situation.
3 Reply
Cody Malave
OP
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
6y
First of all, I appreciate the in-depth response with your personal experience! I love hearing from others with real world advice. However, isn't the entire purpose of an LLC to protect your personal assets in their entirety? I feel as though if it's not all protected then none of it is. But again I have no experience with it, I just don’t want to learn the hard way. We live in such a sue-happy world these days that I want to be as careful as possible with such a high investment. I used to live in St. Augustine for a few years, I wonder how the market is there now. I definitely wouldn’t mind returning, I know it’s growing. Thank you again for the advice!

@Mark Beeson If you don't mind me asking, how are you acquiring additional properties? Do use HELOC's from other rentals to reinvest in new ones? I don't plan on my paying myself until I've developed enough rental income to quit my job. I figured I'd invest hard for the first several years and enjoy it fully later rather than invest slowly and enjoy it a little at a time.
0 Reply
Tim Rogers
Member since 2019 · 1 post · 0 votes
6y
@Cody Malave
You pay yourself from the LLC and it's considered a "distribution"...
You can also take out loans and purchase more properties or keep it as income... just make sure the property can cover the debit service of the loan.
0 Reply
Syed H.
Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
6y
do not pay yourself a w2. that makes no sense.
A lot of your income should be tax free because of depreciation. If you paid yourself a W2 you would have to pay tax on that income.
5 Reply
Billy Smith
Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
6y
The points about the LLC in regards of not using the money in the account for personal use is big.
If you do a good lawyer will torpedo your LLC and try to get at the assets from what I gather ?
I do not use a LLC yet still use a good umbrella, I have looked into it decided to stay with my current set up .
0 Reply
Chinmay J.
Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
6y
Originally posted by @Cody Malave:
Perhaps this isn't the right place to ask this, but in the most innocent way possible I am curious as to how people who have quit their jobs in order to pursue investing as a full time gig make money. Basically anything I've read states that you have to keep your money separate from the properties or any personal assets can become a liability and at a risk of loss. If you are creating an LLC for your investments, how does one (eventually) use the income made on investments as personal finance without blending the two? If not operating or investing under an LLC, how do you prevent your personal assets from the risk of potential lawsuits?

This is the right place to ask, but is it the right time for you to ask this question? If you don't have a single property yet, why not take steps in becoming a landlord first. Then you can worry about this later. You have received a lot of good responses to your question, but I feel there is plenty for you to learn, before you even need to tackle this situation.

Currently, you need to worry about:
1. Where am I going to buy the properties?
2. How am I going to pay for it
3. How am I going to manage them?
4. How am I going to select my vendors?
15 Reply
Mark Beeson
Rental Property Investor · Wichita, KS · Member since 2017 · 31 posts · 15 votes
6y
When it comes to HELOC's I have no understanding of that logic. I too have much to learn. Having $30000 equity in a SFU that cash flows $173 month is dramatically changed into a negative cash flow investment if you do a HELOC. I'm sure there many of you can help make sense out of that cause I sure have I trouble with it.
I purchased my first property in 2001. It was an emotional decision as my daughter with 3 children was being rejected by lots of landlords. 15 years later she moved out and now I have a viable rental. Then we purchased a condo, lived in it for 1.5 years, rented it then purchase another condo lived in it for 2 years and have rented it out. Currently we are full time RV'ers. Now using my VA benefit to buy a duplex which we have to live in one side for 1 year. Now have 5. I have changed my strategy because it is now a bonafide business and MUST be treated as such. BTW, I founded and 15 years later sold an advertising business and operated it successfully without debt. I love staying in the game with my small and growing RE business - what the heck, I've been minimally successful financially and I love swinging the bat - a large RE business is not out of reach! Although we don't take money out of our RE business we could manage a few hundred bucks it we wanted. Yes, I've made more than my share of mistakes. Life is an adventure, onward and upward!
Save your money or use a strategy to raise money, use the BP rental calculator, due your due diligence, buy your first property - house hack or whatever trips your trigger. It's not a fast get rich quick scheme but in time can be very lucrative. Be confident!
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