How To Pay Yourself From Your Properties
New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes
How To Pay Yourself From Your Properties
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Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6yYou 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.
101 Replies
- Investor · Nashville and Tallahassee · Member since 2019 · 31 posts · 11 votes6y
I was advised by a friend with a large portfolio to set up a separate LLC for each property as added protection. More work up front but if you have someone sue your LLC from injury, etc. they would get what is in that LLC....not everything you own. Of course, ask a lawyer. But this makes sense to me.
- Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes6y
Originally posted by @Cody Malave:
@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!
I have all of my properties in separate LLC's with Separate Bank Accounts for each
- New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes6y
@Angelo Mart I want to know how people come up with so many LLC names. Don't they all have to be unique entities?
- 6yAJ ShepardPro MemberReal Estate Syndicator · Portland, OR · Member since 2014 · 453 posts · 312 votes
It takes a while to get established so that you can quit your job. Everyone looks at the people that have been in the business for a long time and say to themselves I want that. I just read a book that had a great concept, the subtle art of not giving a F***, and it describes that the people are successful in the business are the ones that are excited about the process and the rest comes with that passion. So, dive in deep, buy low, add value. As you do more deals you’ll come across different types of deals, and each of these is another way that you can make money. If you are looking to quit your job tomorrow and haven’t invested in real estate, good luck.
Be passionate about the process and the rest will come. - New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes6y
@AJ Shepard I've had a residual interest in the appeal of real estate for a long time, but I've only fairly recently become completely obsessed. Which is funny because now I'm finding myself talking to more and more successful individuals who have their hands in some part of real estate as a portion of their wealth. I lack experience in many areas of it which will come with time but I have a huge network and reliable people that I've maintained relationships with all over the country so I think once I dive in, I'll do okay. Like you said, the biggest part comes from buying low and adding value, regardless of whether or not its a rental or a flip. Making money is done on the purchase and not the sale or cash flow. I'm just trying to minimize and mitigate my risks as much as possible before I make my first purchase. Especially since I plan on pursuing the househacking route in a SFH with SRO's versus a plex of some sort.
- 6yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Jennifer Stradtman:
I was advised by a friend with a large portfolio to set up a separate LLC for each property as added protection. More work up front but if you have someone sue your LLC from injury, etc. they would get what is in that LLC....not everything you own. Of course, ask a lawyer. But this makes sense to me.
With an umbrella coverage that exceeds the suit amount, they would get nothing from you. Not even any value associated with the property that was the cause of the suit. In addition, it covers me personally even for items not RE related (car accident, my residence, anything stupid, etc) . In addition, the umbrella insurance company joins you in any battle because they will be the ones paying any judgement. Sounds pretty good, but a final benefit is that there is no need to keep separated assets which makes it simple. This can be a key benefit when financing RE (LLCs do not typically get as favorable terms as individual, conventional financing)
Furthermore, for those in CA, each LLC has a minimum $800/year tax. If I had each property in an LLC, the minimum tax would far exceed the cost of my multi million dollar umbrella policy (the cost does not increase much to go up from $1m (likely sufficient for most newbies) to $10m). This is only an issue if you live in CA or have your rental in CA.
In summary: 1) it is simple, no need to keep assets separate which can be a benefit at financing 2) your potential loss is less than what typically would be the assets in a single LLC 3) it covers me even for items that are not RE related 4) the umbrella insurance provider has more stake in the suit than the landlord so they will fight hard on your behalf because it is in their best interest 5) in CA, umbrella coverage is cheaper than LLCs.
Good luck
- Member since 2019 · 16 posts · 4 votes6y
@Robert Nelson
https://www.landlordology.com/umbrella-insurance-replace-llc/
This article helped clarify the different scenarios that would be good for LLC vs Umbrella. My feeling is that they're both good things to have when you own 4+ doors, but the umbrella would be a great thing to start out with if you want to put them in your personal name for ease of financing & refinancing.
- Member since 2019 · 16 posts · 4 votes6y
Also important to know LLC costs in your area. Florida I think we paid $125 annually to renew...it's been 5 years since I've dealt with that one. Ohio we pay $99 to establish on Secretary of State website one time....why not on that one🤷♀️ I see a lot of People saying $800/year...that's a bit hefty
They can vary greatly state to state
- 6yDylan PaulPro MemberRental Property Investor · Dayton OH (dayton, oh) · Member since 2019 · 23 posts · 12 votes
Very well stated and I love the macro view of "being passionate about the process." I have a single family and a duplex now with 4 more single families in the works. I'm biased, as I share this same mentality towards loving the process because in my mind, if you don't love the process you're destined for lesser results and more headaches in the long run. I can say falling in love with the process has been the most invigorating feeling in the world. Looking into the book you referenced now.
Originally posted by @AJ Shepard:It takes a while to get established so that you can quit your job. Everyone looks at the people that have been in the business for a long time and say to themselves I want that. I just read a book that had a great concept, the subtle art of not giving a F***, and it describes that the people are successful in the business are the ones that are excited about the process and the rest comes with that passion. So, dive in deep, buy low, add value. As you do more deals you’ll come across different types of deals, and each of these is another way that you can make money. If you are looking to quit your job tomorrow and haven’t invested in real estate, good luck.
Be passionate about the process and the rest will come. - Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes6y
Originally posted by @Cody Malave:
@Angelo Mart I want to know how people come up with so many LLC names. Don't they all have to be unique entities?
Yes it is very easy. Name it after the home address. Change combinations it is always there
Address: 123 Main Street
123 Main LLC
123 Main Street LLC
Main 123 Street LLC
123 Main Investment LLC
I always tend to nail one down!!! lol
- New to Real Estate · Stuart, FL · Member since 2019 · 28 posts · 47 votes6y
@Javier D. Great county in which way? It's terribly expensive here. Definitely a seller's market right now.
- Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes6y
@Jennifer Stradtman. That might make sense until you are spending $75 a year for each LLC to have periodic reports filed for each LLC. Until you are digging expenses out of each LLC, tracking EINS for each LLC, keeping track of operating agreements for each LLC. I have 16 units, a cleaning business, a self storage facility, a trust, and a part interest in a campground. That's 21 LLC's. Each one has to be accounted for on a loan application, all 21 EIN's need to appear on my tax return, each LLC will have only one property? No thanks not for me. I have 4. That's enough. RR
- Developer · Houston TX · Member since 2018 · 423 posts · 400 votes6y
I no longer get traditional loans rather use portfolio loans and commercial loans to buy given my portfolio size. I am not aware Freddie or Fannie requiring 25% on small SFR or anything under 4 units. I know as you get closer to the 10 property limit some banks require extra reserves sitting in an account to be liquid but each bank has its own requirements.
Many of my investor friends here in Houston have found brokers that got them investment loans on their SFR with 20% down. Shopping around to find a bank or mortgage broker that can find lenders with only 20% down just takes a little patience. Now each bank has its own requirements with cash reserves and liquidity. I have found credit unions that will lend on investment properties to have given great terms as do some of the local regional banks. I wish I could get a traditional 30-year loan, even with 25% down at today's rates. I am sure there are many investors here on BP that can steer anyone interested in getting an investment type loan with only 20% down. - Rental Property Investor · NJ and PA · Member since 2019 · 206 posts · 105 votes6y
Read up on the BRRRR (buy, rehab, rent, refi, repeat) strategy. Yes, it's borrowing on existing properties, but you have to create equity in order to do that -- don't just wait years for the equity to grow on its own. Using BRRRR, you seek to buy properties below market that need substantial rehab work, which can increase the value by an amount much larger than your rehab costs. Say, buy for $60k, spend $15k to rehab, increase value to $100k. Then borrow 75% of the $100k value, which, in this case happens to be miraculously the amount you put in, in the first place. So you walk away with all the same cash you started with.
- Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes6y
@Luciano A. I too have a lot of experience. I too use portfolio loans as they are a little easier to get. The lender I use does 10 year balloons and a 25 year AM. I just rolled 4 of these ballon loans into 30 year conventional loans. Fannie and Freddy both REQUIRE the reserves. Like I said originally the bankers overlays usually require the 25% down. Also in order to get the interest below the 4.5 percent my portfolio loans have I had to pay some points. The reason I don't think the hassle of getting a 30 year conventional is worth it to a young investor is because the average investor re finances every 7 years or so. He does this to get money for expansion and to keep his equity level down and his IRR from flattening out. Cash flow from a rental is a fallacy. All you are doing is putting money in a property and letting the renter give it back to you at a really slow rate. If you put $25,000 in a property and it cash flows $300 a month (pretty big cash flow) it's 6 years and 9 months before you get your money back. In that 6 years you have lost 2-3% a year in buying power (another 800 Dollars.). In my book you gotta get that money back before you can call it cash flow. All your doing is tying up your money and get it back at a very slow rate. If you look at an IRR calculator you will see at 7-9 years your return starts dropping because your gaining equity. In order to prevent this many investors do a cash out re-fi, or the other option is to sell. Point I'm getting at is most investor loans never make a 30 year term. Heck most primary loans never make 30 years. A few pennies saved on a conventional loan is irrelevant in the big picture. Besides the tenant is paying it not you. I'm 66 years old my reason for going to 30 year notes was to keep my heirs from having to re finance a bunch of notes at some point down the road. Had nothing to do with saving a couple dollars on the loan payment. The true money is made on the back end. If you are going to try to make big money from cash flow your going to need a lot of properties, and have to hold them a great many years. Even then your only looking at a very low return on your money. A leveraged rental that pays 20-30% in the beginning won't pay near that 30 years later when it's paid off. RR
- Rental Property Investor · Higginson, AR · Member since 2016 · 48 posts · 46 votes6yI am not a lawyer, But speaking as a person who Was sued personally. (personal injury). The first thing my attorney told me was "We don't need to any type of business with out an llc" . I had to take out a mortgage on the paid for rent house , that was my previous residence. That money was up for grabs, had to sell all the toys, motorcycle, boat, extra cars, All that money went to the attorney. My attorney said I don't know what to do for asset protection! I went to another one that gave me direction. As they say " he didn't have a dog in the hunt" during the lawsuit. All in all 25k later in legal fees, and I had nothing left but the house I live in, and 1 car, "The things they cant touch" I was let go personally Even Divorce papers were drawn up , she gets the first 50%, that was to save half. During all this procedures, the 50% interest of the rental houses under the LLC's were never brought into the lawsuit. In a short version. where I live a $50 llc would have saved me 25k in legal fees. Asset Protection is the best education you will ever receive. I own nothing in my name today except 1 house and 1 car. I have three llc's, and Insurance out my A**
- Brookfield, WI · Member since 2016 · 191 posts · 108 votes6y
Originally posted by @Cody Malave:
@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?
while I am not a large scale RE owner, I skipped the LLC/etc. and just upped my umbrella liability insurance, and made sure my agent was aware than I had rental properties and those should be included under the umbrella (and the addresses are noted in the policy). I think it's like $70 a year for like $5M in umbrella insurance. I'm sure there is a point where your assets are worth enough to move to some sort of entity structure for liability purposes, at which point you should talk to a qualified attorney, but I don't intend to ever get there. Once I hit $10k a month, I'm retiring.
- Investor · Rock Island, IL · Member since 2018 · 24 posts · 7 votes4y
One strategy we are using a lot of our "owners investment" as a "loan" to the company in the form of down payments on investment properties, then will have the LLC repay the "loan" back as we enter into retirement. We both have decent W2 jobs, live off of one income, use the other W2 income mostly for investing. I feel secret is living off one income (for two income house holds) and using the other to buy rentals. It's like putting unlimited funds into your retirement account. Later, you can repay yourself from the cash flow from your rentals.
- Member since 2023 · 1 post · 0 votes2y
Quote from @Brandon Hicks:
@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.
Are you saying to just write yourself a check or transfer money to my personal account? No need to take out payroll taxes as you go?
- 2yJake BakerBusiness MemberFlipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 695 votes
It depends on which market you plan to invest in. I invest mainly in Jacksonville FL where the price points tend to be lower than Southern California. I think it's pretty silly to put each property in a separate LLC with different bank accounts/credit cards. You're just racking up a bunch of LLC fees yearly and you have to separately file Tax returns for each LLC which also adds up. We put 5-10 properties in each LLC and then move on from there to a new one. Just depends on your risk tolerance. Whenever We have access cash to disperse to the LLC members we just disperse it. Taxed on the disbursements your tax when you realize the gains on the sale of a house for example for LLCs.
Hot Take - Accountants will tell you to put each property in a separate LLC Because that makes more tax returns for them to file for you. 🤷♂️ I'm not an accountant or lawyer, confirm with your own
BookkeepingRE - Bookkeeping for Real Estate & Service-Based Businesses58 Reviews - Member since 2023 · 3 posts · 0 votes7mo
Old thread. But nobody is talking straight. And most answers are incorrect. Because most people think in 2 dimensions. Profit and loss. But there’s a 3rd..and this even trips up CPA’s. Equity. Rental PROFT is taxed. Not rental equity. What’s rental equity? And also let’s be clear and call in “draws”. Don’t say salary, don’t say distribution. Be very deliberate with these words. And whatever you do, do NOT report your draw on your P&L as payroll or salary. For god sakes. Here’s an example
$400K gross rents, $300K in operating expenses, $80K in depreciation. Leaves 20K taxable PROFIT from your schedule E flowing into you 1040. Everyone with me? Ok. But wait what about the 100K still in the bank? $400k-$300k is 100K. We really do have a 100K in the bank as the depreciation was a paper loss. Does that 100K get taxed sitting there? Nope. This is NOT an S-Corp where profit whether you move to your personal account or stays in the business acct STILL gets taxed? Wait what? We can talk about S-Corp later. Anyways you truly have 100K in the bank, you truly pay tax on the 20K from the Sched E. Now what?
it’s called a draw. You’re taking equity out. There’s no tax on equity. So each month a draw a 5K. For the year it was 60K. Leaving 40K in the bank.
Come on people. Let’s GOOOOO - Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes7mo
The properties (or LLC) collect rent, pay all expenses and reserves, and whatever is left over is profit that the owner can transfer to their personal account as an owner "draw" or distribution. The key is keeping a separate bank account and clean books for the properties so business and personal money aren't mixed and your liability protection isn't weakened. An LLC doesn't stop you from getting paid; it just changes how the money flows and gets reported.
Big picture, though, the “right” structure depends on your situation, so it’s really important to run this by a real-estate-savvy CPA and an attorney so you’re handling liability, taxes, and distributions correctly for your specific setup.
Not legal or tax advice, just sharing how many investors handle it! Definitely run your setup and strategy by a CPA and attorney who know your full situation.
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