Transitioning from W2 to REP in a dual high income houshold (First Post/Long Post)

[Kevin Perry]

Greetings -- I've been lurking and this is my first post.  I've searched the forums on this topic but haven't seen a situation that mirrors mine so here we go.  

Wife and I are in our early 40's and have successfully climbed the corporate ladders (she's climbed higher).  Long story short, we made the decision 3 years ago to relocate to her small hometown in Wisconsin after 20 years in numerous major markets (Atlanta, Dallas, LA, Denver).  This transition has been wonderful in many ways, especially for our small kids (ages 5 & 7), but the significant travel for both of us (2-3 weeks/month/each) and uncle Sam's cut are leaving us asking is there a better way?  Below is the quick financial picture and an initial strategy.  Please weigh in.  

Financials

-- Current Comp:  Me ($280-300k).  Wife ($600 - 750k) Yes, based on my wife's comp alone, the first dollar i make is taxed at the max rate.  

-- Primary Residence Equity + Retirement Accounts + Kids 529 + Emergency Cash = $3 million+  (We really don't want to touch any of this)

-- Free cash $250k.  

Real Estate Experience:

-- Purchased, improved, and sold 3 primary residences between 2008 & 2022 as we relocated for careers.  Cleared over $1 million in profit.  Maybe we just got lucky, but I'd like to think we had an eye for value and made appropriate improvements to maximize profits.   

-- Rented the first property for 2.5 years after we moved out but sold to take advantage of the 2 in 5 primary residence exclusion.  

Current Market 

-- We live in the only rural area between Wisconsin's two largest markets, Madison & Milwaukee.  Could expand into these markets but would like to start locally, self managing to learn.  

-- Our immediate county is significantly devoid of rentals and rent prices are still way below new mortgage markets indicating there may be opportunity for rent increase.  

Transition to REP

-- Ultimately, it's not sustainable for our family for both of us to continue to travel for our W2 careers and based on our fields, not a reality to only work locally.   We've looked at buying main street businesses but are generally more comfortable with RE.  We see huge tax advantages if I can gain REP status, but it's not something we want to jump into haphazardly.  I'm talking with a mentor, local real estate attorney, and a few agents, and have already made a lot of connections with local contractors.  Below is an outline of a plan but I'd like the forums feedback. 

Goals -- Build long term income generating wealth.  Provide significant tax saving w/ REP status to offset spouses W2 Income.  Create more work/life flexibility.  Be able to pull out cash (if needed) but hopefully re-invest the majority of it to build the business.  

-- The basis of the plan is to use our current free cash and the majority of my post-tax salary for the next 3 to 5 years to start making RE purchases within an LLC. (we can survive based on my wife income alone)

-- Initial Focus would be cash flow with significant down payments 30-50% on small (duplex/triplex) MFH. Cashflow is brutal on SFH in my area right now. Purpose of building cash-flow is to show income within the LLC to improve lending conditions when i leave W2 role down the road.

-- Attempt to acquire 10-20 of these types of properties over the next 3-5 years while still employed via W2.  Consider keeping an eye on market conditions and cash out refi for diversification (into other types of RE) opportunistically.  Consider RE license while still employed.

-- By year 5, I'd like to leave W2 role, and focus on REP full time. Look at increased diversification into commercial/development projects using the cash/leverage of the LLC.

Is this realistic, Is there a better way?  Again, the goal isn't necessarily to replace my income, but rather build long term wealth/income, take advantage of REP to offset spouses taxes, and be present at home more consistently. 

[Marcus Auerbach]

Love your plan, but let me tell you where the issues are. REP status requires that both of you work in RE, at least one full-time and the other more than half. Look up the rules. I still think it's a great plan, but you want to make sure you are not hating the lifestyle. 

You need a love for brick and mortar to sustain REI long term, not everyone has that and there are other businesses that you might like better. And as far as getting licensed, 85% quit in year one and of those who remain, another 80% quit in year 2. Because the reality of the job is not what they thought.

For most people it takes about 10 years to build a portfolio that can sustain them, but it can be done faster if you have funds to start with. It took me 7 years to quit my executive W2 role, but I was also incredibly lucky to start buying rentals in 2009 and Milwaukee RE was cheap back then. Today it's tough to find a deal that cash flows with 20% down, but it will 5 years from now.