Imagining the beginning of a R/E investors career, what does it look like to pay yourself as an investor? To add more context, let say you're a hustler and within the first year completed 2 flips, gaining $40k profit each, and purchased 3 rental properties netting you $3000 a month in total. At the end of the year, you've made a total of $116,000, net.
I understand there may be different ways to pay yourself through this depending on how you've structured your business. However, would most consider the $116k personal income and have a bank account where it all flows into for spending however you see fit, be it reinvesting, personal travel, etc... or would you consider it business revenue and take a salary? (keep in mind the $116k is all net...so after you allot for all expenses and portion for cash reserves, etc...this is strictly profit)
If you take a salary, then, breaking each property's profit up individually, would you take a percentage across the board or a flat dollar amount per strategy?
Or is there something else entirely on how you pay yourself?
Thanks in advance for your responses!
Lets say in the first year you do those 2 flips , since you are new , you over pay on the first and you barely break even . On the second , your contractor doesnt pull permits and you get busted by the inspector , a 4 month delay and fines . And those 3 rental properties , one is doing fine , the second one the septic failed and you need a advanced system for $20K and the last rental the tenants didnt pay and you have to evict and repair $ 10k of damage ,
Now , you were saying something about paying yourself ?
I own a construction company so I have always taken my "paycheck" from that company . I have reinvested pretty much every dollar back into more rentals. If you are pulling money out to live on , you'll have to figure out what works for you. By building up my rental portfolio, my passive income is now 3 times my earned income. I mainly keep my construction company for all the benefits, including having maintenance guys on payroll for rental repairs. Also nice collecting a rent check from the construction company for the warehouse it occupies.
The IRS regards flipping and landlording as different types of income. This leads to different types of taxation. Income from flipping is subject to payroll taxes (social security and medicare). Income from rents is not.
When annual income from flipping becomes substantial (somewhere north of $40K) many investors opt to have their flipping business taxed as an "S Corp". This can reduce the amount of payroll taxes you have to pay. When you have an S Corp, you MUST draw a salary from it. Have a discussion with a tax professional about how that works before you jump into S Corp world.
From the rest of your investing, it is completely up to you as far as 'paying yourself'. If you want to take 10% of your money to live on and reinvest the rest, or you want to take 90% of your money and invest the rest, it is up to you. It does not change your tax situation either way. The IRS is going to tax that money as income as soon as it is yours, they don't care if you use it to buy another property or to buy Starbucks. They also don't care if you take money every two weeks or if you take one annual withdrawal on Christmas Day each year.
Just keep your business and personal accounts separate. Have your business money in a business account. When you want to use it for living expenses move some money to your personal account, and then spend it on the things you need. Don't buy personal items directly from your business account. There isn't a law against it, it's just a sloppy business practice.
Best of Luck with your Real Estate Investing!
Thank you all for you responses! @Paul Allen That definitely makes a lot of sense. Seems there is no "common" way to pay yourself since everyone has a different strategy and each strategy will ultimately determine the best way to earn a living.
if you truly are a hustler, you should determine a salary that you can survive on and, reinvest the rest. how you do that is likely going to be determined by the structure of your business. this is assuming you don't have a w-2 job. if so, reinvest everything.
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