How do you pay yourself?

Question

I'm trying to sort out how you go about building up your business, especially once real estate investing becomes your primary source of income.

Ideally you are making money from whichever strategy you choose, but how do you figure out where that money goes?  Does it go back in to your business?  Do you live off of it?  How do you split that up?  I'd be curious to hear your stories about how you went about creating a self-sustaining business while also feeding your families.

Thanks

Dan Bosak · Answer

This is a tough one.  It's so easy to find ways to spend the money that comes in from real estate back on the the business.

The book Profit First from Mike Michalowicz is the best structure that I've found for actually paying yourself.

I modified it a bit but have my bookkeeper moving funds from my checking account each month into 2 separate savings accounts; 1 as an escrow for the quarterly tax bills, annual insurance bills and reserves for major expenses and 1 as a profit account.  I take a small monthly pay and then quarterly take 1/2 of what is in the profit savings account.  If something major comes up, I still have reserves so the business doesn't fail.

It's tough to implement though since I still find myself reinvesting into the business since there is always another great deal and once you get into it, it's tough to pass up.

Ralph Chiaia · Answer

Kyle, I re-read your post and want to try to answer you with a bit more focus than yesterday. I think you need to assess how much money you are bringing in in residual income from your real estate rents and then break it down. I'd go with something like this (definitely adjust it to your business model):

15% Tax

15% Vacancy and Maintenance

50% Pay Yourself

20% Set Aside for Future Deals

So if you collect 1000 in rent you'd save $150 for Tax, $150 for 'Maintency' (Vacancy + Maintenance), $500 for you to enjoy that month in your personal account, and set aside $200 to let build until you have enough for the next deal.

I tend to break down my business as an agent a bit differently than my business as an investor. One thing that goes up as an agent is the amount of tax I pay. Also, my operating expenses as an agent are significantly higher.

Hope this info helps. I have a lot of the same questions you have!

Ralph Chiaia · Answer

After reading Profit First by Mike Michalowicz I broke it down as follows. I run a small business importing good from China and Korea and selling on the Amazon market place. For that I opened all business accounts in a local bank (where I happen to know the owner through tennis -- I moonlight as a college coach) and have 8 accounts in that local bank (Income, Profit, Owner's Pay, Tax, Opex, CapEx, Adverts, Emergency) filtering into down in 3 HOLD ACCOUNTS (TAX, PROFIT, VAULT). I'm using the VAULT HOLD to hold money for purchasing new products, which is the lifeblood of the operation. It took a while to set all these accounts up but it seems to function well and they're all business accounts so there's no problem there. I was pretty stringent about following rules. My accountant will be pleased.

However, with my Real Estate life as both agent and investor, I was a little more liberal after doing some research on BP forums. I had already opened Biz Accounts at Bank of America with the EIN of each of three LLCs, two go to rental buy and holds I own. I nicknamed each main account INCOME to use as the "Serving Tray" account. Monthly rent from tenants comes into that account for each property. I added another biz account for each home and broke it down as "Vacancy + Maintenance" (which i'm calling "Maintency" for lack of a better word and staying under the bank's character limit). I'm just holding "Maintency" for a rainy day, which will come when I have a vacancy or repairs needed. Then I made personal savings accounts for Owner's Pay, Profit, and Tax. Those filter to a different small bank called Flushing Bank which is an uncomfortable 1 hour away from me so there's no way I'm going out there unless I absolutely need to. I figure that's a good deterrent to ever spending frivolously. I currently hold 2 rentals as investment properties (I'm still a total newbie!) and I'm combining the profit, owner's pay, and tax from them in the one account at a different local bank. As I add in rental properties, I have 3 on the horizon for 2020, I will set up the same system and send all monies from Tax, Profit, Owner's Pay to that local bank to Hold. When I make money as an agent I have set up a few more accounts to break the serving tray into OPEX and CAPEX for recurring software I use and my advertising budget. That was easy to do. Again, all profit and tax go to that same local bank.

I had to draw this construction up multiple time and make a few spreadsheets before I could comprehend what could go where and make sure I wasn't sending money in circles. I already feel a major weight off my shoulders. My goals have come into focus much more. I have a mortgage on our apartment and one of my top goals is to create a 5 month reserve (right now I have 1/8 of a month saved). I'm setting aside a bit every quarter to make that happen within a year. Also, I had been putting the large expense of buying new products for my import business on credit card, incurring about 20k in debt every September in preparation for the holiday season. I am never going to do that again. I'm using the profit to pay down this year's credit card debt and from then on using CapEx >>> Vault to save money and not spend a dollar more than what I've collected to spend for the 2020 holidays. This should make me make much more prudent deals.

I strongly recommend reading profit first or watching a YouTube seminar of it for its wisdom and humor. Not only did it illuminate a pretty dull bulb in my own head but it made it easy to share with my wife and son. I sat down one evening with my wife and we watched a seminar to get her on board so she understands why we are on such a strict budget. I took all our credit cards (personal and biz) and put them in a folder that I've hidden. I don't think we will ever be allowed to use them again. Meanwhile, my son who is 8, got wind of these ideas and I have him on a chore system where he puts his earnings in various envelopes marked "College Fund," "Mad Money"  which is for Nintendo switch games, and "Big Dream".

That led me to contact some of my suppliers in China to see if we can build a 5-part piggy bank with labels. I'm working on that right now. I'd love to produce and sell that. I always feel like any product my son would be proud to use is a quality product.

Although I've set this up I still have some questions about how accounts have to be personal or business. For now, I think it's good keeping all monies that pay for business spending in business accounts and letting money that goes to me personally run through personal accounts. I still wouldn't bet my life that that's the best way, but I'd bet money on it. If anybody out there has any knowledge about that, please let me know. In other words, is it cool to take money from a business account and then hold it in a personal account. Does that "pierce the LLC shield" at all? Thanks for listening. This is my first in depth post on BP.

How do you pay yourself?

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