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?
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.
@Luciano A. Most lender overlays won’t allow a 20% down payment they want 25% after the first one or 2. In this market it’s gonna be very hard to find a purchase price that will cash low at 20% down anyhow. Also you are going to need a substantial amount of reserves to get a conventional loan. I can’t remember if it’s 3 or 6 months for each property you own. I had to show 75 k reserves for one loan I got. They have capped the requirement since then. Point is if I have an extra 50-75 k laying around I’ll probably use it to buy another unit with a portfolio loan. Your not paying the interest any how. The tenant is. Penny pinching a little once in a while is ok but you will never get big by acting small.
@Fred Cannon I agree with a lot of what you said but there’s another side to RE. Your correct 10% is tough BUT... cash flow is not the big boy on the play ground right now. Appreciation is. I just sold a property I owned for 2 years. It was a second home so it couldn’t be rented the first year. We bought it and used it as a second home with a 13k down pmnt. After a year and a half I rented it out for about 100 a month CF. After 6 months the lease expired and we sold it. After expenses we put $47,000 in the bank. At 100 dollars a month it would take a lot of years to get that 47k. My initial investment was a 5% down pmnt. It took only 2 years to turn that 13,000 down payment into $47,000. I’d do that everyday if I could. I’ve done that twice now and as long as the market is going up I’ll keep looking for similar opportunity’s. RR
@Ralph R. Appreciation is risky due to the market is it not? Cash flowing properties at low mortgage rates are going to be much more sustainable if the market crashes. I'd rather focus on flipping than renting if I was looking at short term gains. Back home most 3/2 SFH's or something similar are going for about 110k-130k and rent in the 1200/mo range. A majority of these homes are 40-60+ years old. Through a realtor friend I have back there, there are foreclosures going as low as 35-40k in the same area. Would that be something worth pursuing? I suppose for me the risk aversion comes from being 1800+ miles away and the age of the homes in a place with harsh winters.
@Ralph R.
In the great state of Texas you can still find cashflowing deals with just 20% down. But I agree the banks reserve requirements can sometimes be challenging for someone just starting out but getting a 30 yr low interest rate as conventional is safer in this market then going with a portfolio loan that has a 5 yr balloon. I myself no longer qualify for traditional loans do to my portfolio so use LOC and cash to purchase deals then refi into a commercial loan from a local bank but for someone starting if they can lock in a lower rate would be more advantageous and help them keep and manage what they have built in a down market.
@Cody Malave I built most of my portfolio from 3000 miles away while I lived in Alaska. I still own a duplex I’ve never seen. You gotta Learn to mitigate risk. “You say if the market crashes”. I said in my post it took the right house. Remember I had 13,000 in the house. If the market crashed I still would have had the $100 a month. That’s .09% right? Most people don’t understand when you rent a house you are simply putting a bunch of money in the house and the tenant is paying it back to you at a slow rate. I had 13,000 in the house I sold. At $100 a month its 10 years before I get my money back. Money looses value or buying power at about 2% a year so my 13,000 will loose $2600. That’s another 26 months to recoup that. I would be better off to take the same $13,000 and make payments to myself at 100 a month. So you see land lording is a loosing deal in the long run. Flipping is tough because right off the top you are paying taxes. And what happens to a flipper when the market falls?? Besides flipping isn’t investing so much as it is a job. It’s a form of self employment. That’s why you pay taxes. Read my post on this thread wher I explained how I re-financed this year and put 150k in the bank. Tax free. And now my tenants are making the payments on the new loans. This is the third time for some of those houses. I look at cash flow as cushion not as profit and tenants are place holders. They pay all expenses on a property while I figure out how to make some money off of it. Re-fi? Hold for Appreciation? Fix it up a little and sell it?? The tenant pays the bills and I get to play with the property till I can make some money with it. Where’s the risk in that? RR
@Cody Malave if you take money out it gets recorded as ownership draw. If you put money in its ownership investment. Just have to classify your transactions correctly
I have 37 spread across 14 properties. I did start using a LLC for the last 3 I bought. I keep my personal and business accounts separate. The personally owned rentals go through the same business account. Then when I need to pay my personal bills I transfer the money to the personal account. I don't know about the liability advantage of the LLC. I keep high limits on my vehicles, have a umbrella policy. The umbrella is currently about 700 a year. I have the properties insurance through 4 different companies because of caps on the number of properties and because they are owned by LLC or personal. I have the the umbrella in a stand alone company as well. I don't know if there is any value in it but my thought is being separated would better if something did happen. Important note. A personal umbrella won't cover something at the LLC property so get a separate umbrella or higher liability on those properties. As stated above if you are leveraged there is less chance of getting sued. There was a guy above that said his rentals are free and clear and he carries state minimum auto insurance. He is one bad car accident from loosing it all. By all means be a good landlord, follow the rules, keep nice places. You can do everything right and still have something bad happen that wasn't your fault. I can give a lesson learned about overextending your self with financing. I have taken out a handful of second mortgages on rentals the last few years. Then I got my first ever car loan, then a second car loan for my wife. Then I used cards for a good chunk of my last big projects one fix and rent gut job and a roof on a apartment building. Now my wife and I are looking to buy a new personal home and find out our debt service ratio is not so hot. The solution we are working is a refi on 3 properties and paying off all the seconds, autos, and cards. Looking back if I would have refinanced into new 30 years and kept my payments lower I would have been in better shape. Lesson is keep a close eye on your ratios.
@Mark Beeson
Awesome post!!
@Joseph Hammel precisely the kind of response I was hoping for. I’ll have to look into this umbrella policy idea, I’ve never heard of it until I posted to this forum. I’m fortunate enough to have a decent personal debt ratio, and could be completely debt free (sans any pending properties of course) within the next year if I don’t purchase my first rental so I’m ready to dive in.
This thread has been one of the best I have seen on BP. Lots of great advice and lessons learned. Thanks be to all who joined in This thread could be a best seller on BP. Some one should put together top 50 threads and put it on a digital download. Could be HUGE lol.
@Cody Malave
Every question answered leads to keep questions...I’m totally with you there! Great post! thanks for sharing
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.
This. I'm no tax pro, but If you take the pea from under the passive income shell and put it under the earned income shell, you now subject yourself to SE taxes. For what? To qualify for a loan later? Maybe, but still not a good reason I wouldn't think.
Other than during negotiations, I keep (make) the most money by not paying others to do high dollar tasks I take care of myself. You're essentially earning what you would have paid out plus sales tax, income tax, etc. So like 1.3x. That's my pay.
I do have the right, but not the obligation, to pay myself a mgt fee via my mgt s-corp. I can also invoice for labor but usually don't.
Each year is different, so I play what-if at tax time. There have been years where funding my defined benefit pension plan made sense, so I essentially earned income, then contributed. A high percentage would've been tax anyway. If you're gonna get sophisticated, get sophisticated!
@Cody Malave. I advise my clients to set up LLC's from the beginning of their business. It is very inexpensive and it does offer you protection, not only for your personal assets, but also in what can be obtained in a lawsuit.
I want my clients implementing good practices at the start and getting their systems lined up BEFORE they have multiple properties.
I would pay yourself as you would an employee, on a set schedule (many do it on a % of profits so the amounts fluctuate) and do not co-mingle funds or use your business cards for personal expenses.
I have had several lawsuits that I was able to keep business financials out bc they were very clearly separated and had separate LLC's.
I would recommend finding an accountant that has investor clients and set up a meeting. I did this when I opened my firm, before I could afford to have one full time. I paid him for a few hours and used that time to ask a ton of questions so I could implement his advice on my own. I think everyone’s goal is to pay as little taxes as possible and an accountant will be key to advising you how to structure your businesses to do so.
I would also have an attorney help you set up your LLC and business plans for your first company then you can replicate it on your own for subsequent ventures. I have a lot of people come to me after they purchased document drafting online and attempted do the formation themselves bc they don't understand what they are doing or why they are doing it. If you hire a knowledgeable attorney, like with the accountant, you can have them answer all of your questions so you have a good understanding on what to do the next time.
@Cody Malave I have a mix of both, some in LLCs and others not. I started roughly 6 years ago and the first 3 properties I got now have great equity in them because it use to be a hidden gem location but no longer is. Those properties I have in an LLC because I have more to lose. The other 3 I have I paid much more for and are leveraged pretty high with not a lot of equity so I have really good insurance on them and are in my name. I do also have good insurance on the LLCs props as well. In addition I require that tenants have renters insurance with a minimum of 100k liability in case a guest of there's is hurt on the property or something of theirs is ruined or stolen. I just make sure none of the money intermingles with each other and even go as far as not transferring money from one acct to another on Mobile app/PC and do it at the bank.
Great question thanks for asking! I plan to property manager myself & love the feedback also!
@Ryan Deasy don’t you end up paying taxes on your money twice this way? Once on the rental income, and again on your w2 from the management company?
@Cody Malave I am new to all of this, I have an LLC with a partner, I plan to take 10% of gross rents to manage the property. I will take it as a distribution since I am an owner. My property is an 8 plex, so I feel taking it as a distribution rather than a mgt fee keeps expenses lower. That way it does not reduce my NOI for appraisal purposes. Like I said, I'm a newbie so my line of thought could be backwards.
@Ryan Proffit for a partnership an llc with a good operating agreement is vital because the operating agreement is the form of the business ownership and it can eliminate many misunderstandings.
Also, I’m sure there are exceptions but you can’t get a commercial loan without having a corporate entity and the llc is usually the simplest one.
Commercial paper may have higher rates for regular rentals but it greatly broadens the scope of what you are able to buy and restructure. Depending on the scale, you are a more valued bank client and the loan parameters can be much more flexible
@Cody Malave
If you are a single member llc then its considered you as far as taxes go meaning do what you want just keep records and clarity for your accountant.
I have a dropbox folder i share with them which includes an excel of certain transactions such as purchases, large transfers.
I keep about 4 sfh in one llc lets call it xth1
Next 4 xth2 , xth3, xth 4
I also have an account for the properties which sre under my personal name which are mortgaged.
Commercial properties are each under 1 llc and each llc has a bank account. Have 3 personal accounts one is my personal account, one is savings, one is for cap ex/repairs.
I transfer on the 6th of each month all profit to my personal accoubt from all llcs. I leave 15% of each months gross in each of the sfh llcs and 15% plus mortgages in my personal where i deposit the personally owned properties ones(mortgaged). Once my repairs/capex reach a full months rent i transfer them to a high yield savings or cds. Wish i could find something with a better yield but everything is compressed right now.
Sounds complex but its not.
@Javier D. When you say you have a personal account which includes repairs, if you use the funds from that on repairs on any of the properties wouldn't that be considered co-mingling of funds and defeat the purpose of protection from the LLC? Do you have an accountant to keep track of all the different accounts? I can imagine it gets to difficult when spreading out so many different LLC's and properties.
@Jennifer ODaniel I'll definitely have to look into it further. Most of the other poster's here seem to believe that LLC's are essentially useless but I haven't found much online of comparisons for an umbrella policy vs. an LLC. I've seen a few people mention something about setting it up as an S-Corp(?) as well. Where I'd be a sole proprietor or single-owner LLC I'm just trying to establish a baseline that allows me to eventually pay myself without additional risk to my personal assets in the event that something goes poorly in the future. I also would not want multiple properties assets or equities be at risk from one another but having endless LLC's to match each property sounds cumbersome. Surely there must be a way to protect them all at once without so much individual work.. or is that what an umbrella policy covers?
I appreciate the feedback from everyone too, it's hard to keep up with responding to you all individually but I'm definitely reading every word!
@Cody Malave
The personal account only holds income for the properties i have directly under my name.
Each llc has its own account as well which holds 15% of gross for the rents of those llc held assets . Each account keeps the reserve for the pertaining properties held in title by that account name.
Account 1 llc gets rent from the 4 properties held in that llc. I leave the 15% in it and utilize it in that account.
Lol its not as complicated as it sounds. My checkbook has 7 different checks and ill pay subs/property taxes/liability/repairs etc from the corresponding accounts.
Its actually super organized. Im always looking for more efficiency though so ill keep a close eye on this post.
@Javier D. I’m surprised this post has taken off like it has. Makes me feel like I joined the right place! I suppose I could always be overthinking too. I need to first with one property and I’m sure I’ll learn to grow as I go as far as keeping track of everything.