Early Full Time Investors - How do you pay yourself??

[Trevor Dominique]

Hey BP,

I am hoping to get some input from full time investors, specifically those who are very "hands-on" with your own investments. I currently have 12 units, with a SFH home and 2 lots under contract, in which we intend to develop duplexes. With things growing, I really want to leave my 9-5 job to focus on my investing business.

I currently live a pretty cheap lifestyle, so I only need about $30,000 annually to live very comfortably. So, where my head is at, let's say I do 4 BRRRR projects in a year where each project is a $50,000 renovation, or $200,000 in renovations for the full year. Let's assume $100,000 of that is labor cost, and let's assume half of that is stuff I could do myself instead of hiring an outside contractor, or $50,000 worth of labor. This would be more than enough for me to live comfortably, and then the rest of my time can be spent managing the rentals. All of the rental profits could then still be reinvested since the payment to myself would be a part of the capital investment (rehab), and not expensed against the rental income once the project is officially in service.

However, I understand that with me being structured as a single-member LLC, I cannot pay myself an hourly rate for the work I do, or in other words have my LLC send myself a 1099-NEC at the end of the year. The money I pay myself would have to be through a draw from the LLC to myself. This is a little tough for my brain to process. Basically, here is where I am getting messed up:

Scenario 1: All renovation work hired out

Purchase: $50,000

Renovations: $50,000

Total Investment: $100,000

Liability: $100,000 (private credit line)

Equity: $0

If the property cash flows $2000 and I pay down $2000 in principal after the first year, I have $4,000 in equity on my balance sheet after year 1. 

Scenario 2: $20,000 worth of renovations done by me

Purchase: $50,000

Renovations: $30,000

Total Investment: $80,000

Liabilities: $100,000 (private credit line)

Equity: -$20,000 (negative due to draw to myself)

If the property performs the same as in scenario 1, I have -$16,000 in equity on my balance after year one. 

This makes it feel like it is disadvantageous to perform the work myself, when in reality the investment is in the exact same spot regardless. 

I know this is just accounting and bucketing of costs and that its just the framing of money. But again, just trying to figure out the best way to pay myself here and still keep my financials straight. 

Curious to get your thoughts!