How do you quit your W-2?

Question

I was curious if anyone could help me out with answering a this question: How do you quit your W-2 through REI?

I have read THE BOOK ON TAX STRATEGIES for the Saavy Real Estate Investor and it made me wonder how a lot of you on the BP site are doing it. Isn't it a general rule not to mix business/personal finances for tax implications? If you are quitting your job because you have enough income through rental properties and you're not supposed to co-mingle business/personal finances, then how are you doing it?

Sorry, this may be a stupid question and simple to answer but I can't wrap my head around it.

Thanks in advance

Chris Seveney · Answer

I quit my job yesterday to do real estate full time. I have been doing my side hustle last six years. Last two I made more in real estate than full time job and put enough $ aside to be able to take the leap. I took all monies i made in real estate and reinvested them vs. buying new cars etc. I treated it as if I did not have the $ and did not change my lifestyle. Happy to chat offline

Scott E. · Answer

My 2 cents is don't get too hung up on the tax side of this business.

If you're making enough cash flow from your rental properties to replace your W2 income, you're in a position where you can consider leaving your W2 job to pursue real estate investing full time.

I actually left my W2 job without replacing my W2 income with rental income, but I instead had enough cash set aside to cover years worth of living expenses, which is what gave me the confidence I needed to leave.

Leave the tax concerns and legality of things to the professionals (your attorney and your CPA)

Bjorn Ahlblad · Answer

@Cody Morrell paying yourself a distribution is not co-mingling as long as it is separate accounts and you are keeping track. Use separate accounts and cards for personal and business. When you quit your day job then you can become full time REI. Speak to your accountant. If you don't have one get one they can save you a bundle and keep you out of jail! All the best!

Steven Foster Wilson · Answer

My wife just quit her W-2 job in which we were making our primary source of income. We have been able to BRRRR 5 properties and through that bought many more. Through that passive income we started making more than her W-2, so we thought it was time to say goodbye and just focus on RE. It was a tough start and we really hustled but it has been well worth it.

Eliott Elias · Answer

Holding property is a tough way to make income. Your cash flow is tiny, but it’s a great way to create wealth. Start by flipping, wholesaling, I’d say even get your realtors license and make money in all aspects of RE

Scott E. · Answer

Again these questions should be directed to your CPA or your attorney, not to a bunch of strangers on the internet.

That being said, the way I handle my real estate business is I have separate bank business bank accounts for each project that I take on. And when those projects are finished and either sold or rented, I transfer my "cut" from the business bank account to my personal accounts for my use. I never pay personal expenses out of my business accounts, and I never pay business expenses out of my personal accounts.

A lot of detail is being left out to simplify the example. And my CPA reviews my accounts often to ensure I'm running this side of my business properly.

Sam Yin · Answer

Disclaimer: I have never read that book. In fact, I have not read any finance/investing/real estate book.  I know I should, but I have not.  I have listened to 3 audio books on YouTube: Rich Dad Poor Dad, The Richest Man in Babylon, and the cash flow quadrant.

Not sure if I have to right technical knowledge but I was able to leave my W2.  Here's how i approached it.

I calculated my living expenses. This is my minimum survival number. I looked at my current W2, before and after taxes. This is my lifestyle number. I invested for cashflow for get to that lifestyle number. Understanding the tax benefits of Real Estate, I made sure it generated my take home W2 as a minimum. I then factored in my W2 benefits (health insurance, retirement,  etc.) and calculated that number. Made sure my cash flow covered that.

Before I took the leap, I waited a year for consistent cash flow at those numbers. I. The meantime, I continued to invest to add cash flow to over my pre-tax W2 and 2 years reserves. I then asked my self if I wanted to continue to invest,  would leaving my W2 have a detrimental affect on my loan qual... this is a big one. After all that, and making sure I'm no more than 65% leveraged across the board, still have huge upside in rent remaining, and ensuring that I have a core group of rentals that will meet my minimum survival number, I decide to pull the plug on W2.

Here are some actual numbers to use as references (these are not my actual incomes, but close enough for simple reference):

Living expenses = $60K

W2 before taxes = $150K

After taxes = $100K

W2 Benefits = health ins + $70K retirement after 25yrs of service.

Current years of service = 20 yrs

Current Cash flow = $200K

Current Rental upside = +- $100K

Core units for minimum cash flow (6 Government subsidized units)

Pulled the plug on W2 at 20 yrs of service. Got time back with family.

I still want to invest. I plan to pick up a few more small properties and exchange them in the next cycle. I may exchange a few in this cycle. I kept enough reserves to cover 4 years of living expenses. I can pick up work anytime if I needed to.

This was how I did it. Hope you find it helpful. I know there are many different approaches,  but I felt comfortable with this one. Also, had to get the wifes buy off.

Nick Belsky · Answer

@Cody Morrell

I ripped the band-aid off three years ago and haven't looked back.  We struggled for the first year and traveled a whole lot but spent time researching and learning while on the go, then dove in head first.  Had enough reserves for about 18 months before getting into savings if needed.  Never had to get into it.

There's always a risk and the timing is rarely ever good.  Put basic plans together and face your fears and jump.  Like others have said, taxes are for CPAs, your plans will likely evolve as you progress anyway.

Cheers!

Stephen Keighery · Answer

@Cody Morrell you make distributions from your business to yourself or pay yourself a salary. This is the money you should use to pay true personal expenses. Obvously you want to try and make as many expenses legitimate business expenses to minimize your tax.

I agree with the comments that you should get a CPA to handle this but I also think that you should have a general understanding yourself.

Mike Dymski · Answer

Real estate has a ton of tax advantages and sure beats the heck out of tax rates on W-2 income.

How do you quit your W-2?

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