Calculating % Replacement of W-2 Income with REI Earnings

[Gloria Sheridan]

My goal is to calculate how much of my W-2 income I've replaced so far with my real estate efforts. I've set up an Excel tracker to assess this and I'd like your validation of my approach. I'm already 5 buy-and-hold multi-family properties (with strong CoC returns) into my efforts, but so far my calculation is telling me I've only replaced 19% of my income. :-( Can that be right? Seems terribly low. Here's my calculation (and I'm using the same data I've used in the Bigger Pockets calculators, so it's thorough and complete):

Annual Rental Income <minus> Annual Budgeted Expenses = Annual Earnings Before Income Taxes (assume result is $19K).

I'm comparing this figure to my W-2 income (also before Income Taxes). Let's say that number is $100K.

So, $19K/$100K = 19%.

Am I missing something? Is this the comparison I should be making? Because this figure feels super-low for all the effort it's taken to get these properties in place. I've ignored taxes because I don't really know what they are going to be for my real estate business. Is that where there is some advantage? E.g. taxes on wage earnings vs. taxes on business earnings? From what I've researched, it's going to be about the same % that I'll end up paying.

Even when I look at this on a per-hour basis (assuming 10-hr work week vs. 50-hr work week), my earnings per hour doing real estate is not better than my earnings per hour from a W-2 generating "real job."

Has anyone out there made this calculation for themselves? Am I looking at this right? What am I not considering?

Thanks in advance.

[Jaysen Medhurst]

@Gloria Sheridan, you're missing a few important pieces:

1. 20% Deduction of Qualified Business Income (QBI): The first 20% of your rental income is not taxable. There are limits and exceptions, so talk to your accountant
2. Depreciation: how much depreciation are you claiming against the $19k? Probably around $6k, I'd guess. You're not paying taxes on that so it's replacing more income.
3. Your rental income will be taxed at the same rate at normal wages, but you don't pay Social Security or Medicare taxes on it.

You (or preferably your CPA) will have to do that math for your own situation, but my quick-and-dirty numbers say you'll pay ~$2300 of taxes on $19k of rental income, but ~$7k of taxes on $19k of wage income. So that means $19k of rental income replaces ~$25k of wage income.

Of course, there are other complicating factors, like the depreciation of CapEx, but this gives you a rough idea.