W-2 Exit strategy

[Stephanie Cortez]

I am considering the possibility of leaving my W-2 job by Dec. I am in the beginning stages of planning what this will look like and if it is possible. Fears that come up for me are 1. Medical insurance 2. Taxes 3. Security 4. Emergency life situations. I am curious to know more about other folks journey into entrepreneurship. 

What factors did you consider before leaving and how much did you have in reserves, if any? 

What suggestions/feedback would you offer someone who is considering leaving their W-2? 

Also, medical insurance, how does that work as an entrepreneur? Is it astronomically expensive? 

Is there a best way to align your business LLC vs S-corp that makes the most sense for tax purposes?

[Bjorn Ahlblad]

My wife quit her W2 in 2017 after I retired in 2015. We are REI pros and do nothing other than manage our own properties full time.

I would caution you to be careful about any feed back from a bunch of strangers on the internet. Get yourself an accountant who knows REI in your state, and pose questions to them.

Find and join a local REI or land lord Association and attend meetings to get local perspectives on markets, LL/tenant laws and experiences etc.

Hang out here and search threads that may be relevant to you and your desires/needs.

Decide on your objectives from investing, taking into account your resources from financial and time perspectives. Only do what is relevant to you and objectives.

Be a sceptic, there is a lot of hype out there!

All the best! It can be a wonderful journey. 

[Zach Gring]

Lots to unpack here; Insurance quotes I have seen for myself (33 years old, healthy man, single) was high 300's for a decent policy. Catastrophic only coverage was 40/month. Taxes... Talk to a cpa in your state. Security, keep your resume updated, keep your sense of employment work ethic and skills or associated licenses, certifications in case you want or need to go back into the job market. Emergency life situations I would keep a 15-20k credit card empty or LOC, with a payment you have already factored in to your monthly budget.

Factors on reserves; What's your monthly cashflow / how much do you need to live? For my own sake I wouldn't be comfortable walking away without at least 20-30k in personal liquidity in a 4-5% credit union acct. If you have a $1,500 or more spread between cash flow and living expenses, I would consider saving the rest to add to a cushion. 

LLC s selection I believe makes it a pass through entity meaning once tax return however I would run this by an attorney or your cpa as I am neither.

Full disclosure I am in the Midwest so if you're market is drastically more or less cost of living this may vary for you numbers wise. 

[Bjorn Ahlblad]

My wife quit her W2 in 2017 after I retired in 2015. We are REI pros and do nothing other than manage our own properties full time.

I would caution you to be careful about any feed back from a bunch of strangers on the internet. Get yourself an accountant who knows REI in your state, and pose questions to them.

Find and join a local REI or land lord Association and attend meetings to get local perspectives on markets, LL/tenant laws and experiences etc.

Hang out here and search threads that may be relevant to you and your desires/needs.

Decide on your objectives from investing, taking into account your resources from financial and time perspectives. Only do what is relevant to you and objectives.

Be a sceptic, there is a lot of hype out there!

All the best! It can be a wonderful journey. 

[Alecia Loveless]

@Stephanie Cortez I quit my W-2 at the beginning of the year. I called my insurance company to try to get medical insurance coverage and they referred me to a broker who specializes in this through the marketplace. I answered a bunch of questions and the key seemed to be the one about how much income I was expecting in the coming year. I probably estimated high given my real estate tax write offs but said about $30,000 as I’m still occasionally working. He told me I qualified for a discount based on expected income and that while the policy was about $350/month with my discount I only pay about $99/month. It is a good policy, not catastrophic coverage, it compares to the policy I had at my old job except prescriptions are a little more expensive.

[Henry Clark]

Build a map to scale your REI investment. How will you get there?

Dont quit your day job until you have 1 hour left in Sunday evening to relax.  

Lot of other factors, but dont leave your day job until you have half of your wages covered.

If your a hard core entrepreneur.  Dont worry about anything and just jump in.  You need an Eat what you Kill mentality if you take this path.  You will starve at some point. 

[Matthew Paul]

You dont say what you are replacing your income with ? 

My minimum safety net would be 1 year of living expenses in cash in reserve . 

Have a backup place to get back in a W2 job if things go wrong .

Use credit cards as a LAST resort .   If you ruin your credit it can take years to recover .

EVERYTHING is expensive and  it is showing no signs of stopping .

[Dave Meyer]

@Stephanie Cortez Without knowing your financial situation, it's hard to give advice here. What is your current income? How do you intend to make money once you quit your W2? 

In short, my advice would be to think very hard about why you're quitting your job, and then create very detailed budget and financial plan. How much money do you have saved? What are you going to invest? How much do you have to live off? What is your new business? How much money will it make?  You need to answer these basic questions first before you start thinking about taxes, corporate structure, or anything else. 

[Stephanie Cortez]

I realize I didn't share what my situation will be. Firstly, I have 5 doors, 3 units total. I am using a property I own free and clear to pull a cashout refi. I will receive about 110k after costs and paying off some debt with the loan. I had planned to use some of this as reserve. The rest of the money I want to invest in a flip and/or buy and hold. Some other streams of incom I am considering is to get my real estate license. My mom is working on building a daycare business and I may work with her on that as well. I have lots of ideas but nothing set in stone. I know that while I work at my W-2 I am unable to think clearly on my plans and the path I want to take. I wonder if by putting my back against the wall, can I make more money using this cashout than working 9 to 5 everyday.

[Stephanie Cortez]

Quote from @Dave Meyer:

@Stephanie Cortez Without knowing your financial situation, it's hard to give advice here. What is your current income? How do you intend to make money once you quit your W2? 

In short, my advice would be to think very hard about why you're quitting your job, and then create very detailed budget and financial plan. How much money do you have saved? What are you going to invest? How much do you have to live off? What is your new business? How much money will it make?  You need to answer these basic questions first before you start thinking about taxes, corporate structure, or anything else. 

Do you suggest using the cashout refi as a means to leave, give myself a few months to make the money back that I use and invest the rest?  Worst case scenario,  I can get back into the workforce after a couple months.

[Account Closed]

It's simple IMO, if your income covers all your expenses, and you have enough left over to save and invest, you are good to go.

As long as your non W-2 income streams are coming in fast enough to replenish your accounts. (Be sure on those income streams, no speculation.)

Have a good size cash reserve (I had at one point $115K in cash reserves in an account, because I was so cautious about life's surprises, especially medical, I have since eased up on that and put more than half of that to work for me in multiple income streams) waiting in a high yield savings account, or in some state of liquidity, that you can draw from at any time for those unexpected surprise expenses, because sometimes when it rains, it pours.

My medical is $528 a month for a family of four (1-year plan, high deductible, $1M coverage per person) Like with most policies you get a discount, if you pay in full.

[Henry Clark]

I wouldn’t take a Loan out to build a cash reserve.

If you dont have a path laid out I would keep my day job and work on the rest.  Having your back against the wall without a plan is not a good direction.  Like I said before until you only have one hour in Sunday to relax, I would not leave my day job.

How did you get the properties?  If you did not build the wealth to buy them yourself, I would not rely on their income until you have your own plan. 

[Carlos Ptriawan]

in this scenario, you are not leaving W2 but you are changing the stream of income, that's different than leaving w2 completely and doing nothing. Daycare is good business. Before you switch, you need to know getting a loan without a regular W2 is way harder.

[Dave Meyer]

Thanks for sharing the situation, that helps a lot. 

I can't tell you what to do, but if it were me, I wouldn't jump to a non-specific entrepreneurial path -- too risky for my taste. Entrepreneurship is hard, but the good thing is that you can often start it as a side hustle. That's what I would do (and have done), and it's the much safer bet, with a higher probability of success. 

Whether you're starting a business, or investing in a property, you should try to reduce your risk as much as possible. In this scenario, I'd do that by testing out these ideas you have before quitting your W2. What if you hate being an agent? What if it takes a long time to get clients (it's difficult to be an agent right now!), what if starting a daycare is less profitable, and more work than your current job? To me, reducing risk is about eliminating variables -- and IMO you have too many. If you want to quit your job, I'd at least be committed to a single path, and not just try to figure it out once you've deliberately put yourself into a stressful financial situation. 

[Calvin Thomas]

Quote from @Stephanie Cortez:

I am considering the possibility of leaving my W-2 job by Dec. I am in the beginning stages of planning what this will look like and if it is possible. Fears that come up for me are 1. Medical insurance 2. Taxes 3. Security 4. Emergency life situations. I am curious to know more about other folks journey into entrepreneurship. 

What factors did you consider before leaving and how much did you have in reserves, if any? 

What suggestions/feedback would you offer someone who is considering leaving their W-2? 

Also, medical insurance, how does that work as an entrepreneur? Is it astronomically expensive? 

Is there a best way to align your business LLC vs S-corp that makes the most sense for tax purposes?

 I wouldn't quit your day job so fast. One, you should have a year of living expenses in savings.  Two, we have no idea what the world will look like in 2025 since there can be a new US President.  Should the housing market correct, this may not be the most opportune time to go 100% in as an investor with no parachute or back-up plan.

It is best to get into the business gradually and expand when you are able. One cannot control the outside forces (government/economy/career/medical/etc.).  So, you need to be prepared.

Potential expenses to consider:

Food, shelter, taxes, income taxes, fees, insurance, health insurance, medical emergencies, family, auto payments, auto insurance, utilities, cell phone, Internet, clothes, and pet care (if you have one).

[Peter W.]

There’s essentially two schools of thought

The first is that any W2 money you will get is insignificant to business net worth so you should be spending all your time on your business even if it means you have to be homeless. Plus having a job keeps you addicted to your paycheck and makes it harder to break free.

The second group says that is too risky. W2 money is the easiest money you can make so you should take advantage of it and use it to fund your business and then quit once your business is established.

People more successful than I have espoused both views, although I lean towards number 2. Ultimately it probably comes down to your personality. You’ll have to chew through glass either way.

[Jeremy Horton]

Quote from @Stephanie Cortez:

I realize I didn't share what my situation will be. Firstly, I have 5 doors, 3 units total. I am using a property I own free and clear to pull a cashout refi. I will receive about 110k after costs and paying off some debt with the loan. I had planned to use some of this as reserve. The rest of the money I want to invest in a flip and/or buy and hold. Some other streams of incom I am considering is to get my real estate license. My mom is working on building a daycare business and I may work with her on that as well. I have lots of ideas but nothing set in stone. I know that while I work at my W-2 I am unable to think clearly on my plans and the path I want to take. I wonder if by putting my back against the wall, can I make more money using this cashout than working 9 to 5 everyday.

 Ok - I'm going to be honest here - 5 doors - what's that in cashflow? Cash-out refi for 110k to use for a reserve and a flip (that refi will lower your cashflow significantly). Your new stream of income is "considering" getting your RE license and your mom "building" a daycare business you "may work" on as well. This is a lot of talk but nothing has actually happened yet. 

Have you replaced your income? Do you have a retirement account? Have you estimated insurance costs? Do you have kids? What kind of lifestyle do you want to life - ramen noodles and OJ every night? Do you have a husband or wife (all things considered these days)? What's the back up plan if shtf? 

I personally wouldn't do it - a 9-5 really isn't that bad. It sounds like you haven't actually replaced your income & benefits at work either. Loans are harder to get without a W2 job. You lose the benefits and a steady stream of income. How long have you been investing in RE? Are you a pro? If not, I'd tread extremely lightly. 

You can't tell me you don't have several hours each night even with a 9-5 to work on business ventures? Are you going to bed at 11? Are you getting up at 5? No? Do that first. 

I think quitting your W2 is a great long term goal. I'd work on maximizing my time and becoming a seasoned experienced pro before I even thought about quitting my W2. 

[Steve Vaughan]

Quote from @Stephanie Cortez:

I realize I didn't share what my situation will be. Firstly, I have 5 doors, 3 units total. I am using a property I own free and clear to pull out a cash out refi.

Yes, secure any credit you will need prior to terminating.  So many don't do this. 

We are in a health share plan.  $6k deductible and no treatment (substance abuse) or pregnancy is covered for less than $500/mo. If there are things you can exclude with these, it will save $.  

For security, it's just gap management.  The lower your expenses are, the less income it will take to have a safety gap above those expenses. We jumped at 1.5x.  Easier for us with minimal shelter cost via househacking. 

[Don Konipol]

Quote from @Stephanie Cortez:

I realize I didn't share what my situation will be. Firstly, I have 5 doors, 3 units total. I am using a property I own free and clear to pull a cashout refi. I will receive about 110k after costs and paying off some debt with the loan. I had planned to use some of this as reserve. The rest of the money I want to invest in a flip and/or buy and hold. Some other streams of incom I am considering is to get my real estate license. My mom is working on building a daycare business and I may work with her on that as well. I have lots of ideas but nothing set in stone. I know that while I work at my W-2 I am unable to think clearly on my plans and the path I want to take. I wonder if by putting my back against the wall, can I make more money using this cashout than working 9 to 5 everyday.

JUST DO IT!

[Basit Siddiqi]

I would suggest starting your business during your off-hours of your W-2 job.
Build a client base.

I think it is less frightening leaving your W-2 job when your business has atleast 30% of your W-2 wages.

Best of luck.

[John Mason]

To add to the above get a part time job like maybe 20 hours a  week and that way you can have best of both worlds and  focus on it