Do you pay yorself a base monthly salary?

Question

Hi BP'ers,I'm working on my first property.It is a city property that I own free and clear.I purchased it for 8K ,will put 40k in rehab(60% gutted). ARV might be about 55-60k Its a 3/3 duplex.Projected rents $625-$650 each unit.Here are some monthly expences numbers you guys can work with:

Insurance-$120.00/month

Property tax-$98.08/month(will increase after rehab)

Water-$250.00-$300.00/month

My question is how much should I put aside for:

1]taxes

2]vacantcies

3]repairs

4]misc expences

5]cash reserves

after those costs is there anything I can allow myself for free spending?

Thanks,

Edward L. Ray

Patrick L. · Answer

Take your gross expected rent, subtract the utilities you're paying and divide it in half and that should cover your expenses. That's the 50% rule and it's a good rough estimate of your insurance, property taxes, maintenance, capital reserves, vacancy and management costs. It's hard to account for every little thing that will break over time because some repairs are $20 and some are $5,000 but over time things even out.

Dawn Anastasi · Answer

Are you sure insurance expense is $120/month? That seems really high. Also $250-$300 per month for water seems extremely high.

Jared Anderson · Answer

The best advice would be to ask a good tax adviser. Network for a good person in the business. It's worth it in the long run. They will ask you one main questions about how to pay your self a salary: Q) Are you paying yourself through a business entity? or Sole Proprietorship? The answer should be through a business entity, like an S-corporation. With the right entity you can limit the amount of taxes that you are required to pay on the money your company is earning. The idea is to take as small of a salary as possible (A good CPA will know the right salary to take). If you are taking all your earnings through a salary you are going to pay more taxes. If you limit your salary and pay yourself through dividends then you eliminate paying excess taxes.

Michael B. · Answer

The people who pay themselves typically quit their day job and are using their rentals as their job. The people who have a day job and rentals typically use any of the rental money purely as investment money and keep reinvesting any profits. Im sure there is a grey area where some people take money even though they have a day job, but then you have to ask yourself what are your goals and what you really expect from your rentals.

Matt Devincenzo · Answer

Disclaimer: This is not tax or legal advice. If you are doing your investment in your personal name, or as a single member LLC then you likely need to do very little. An LLC is a pass through entity meaning that your investment profits and expenses will just pass through to your personal return. Whether this is the best structure or not is a question for an accountant. Your salary question would probably be more applicable if you were operating as a corporation (C or S corp), or had some complex business structure, which it doesn't sound like is the case. What I would do to keep things as simple as possible is have a separate account for your investing everything goes in and out of there. You don't need to take a "salary" likely, and just allow that money to grow and reinvest it as appropriate.

Edward Ray · Answer

Thank you I will take that advice well.

Bob Hines · Answer

If you are talking about taking profits from your investment, yes you can do that at any time. If you are talking about paying yourself an actual, technical & official salary-DON"T DO IT! If you pay yourself a salary you are now subject to the 15% self employment tax. One of the big advantages of real estate investing is that it is considered Passive Income by the IRS. If you take the profits, as Passive Income, you avoid that tax. Depending on your income level, you may be able to take real estate loses against your regular income. As you now own a business, try to convert as many of your personal expenses into business expenses as you legally can. As you get larger and if you end up in real estate full time, you will want to talk to professionals and make the decision then if you should work in a salary for any reason. But with this as your first investment, read up on the 50% Rule, read as much as you can on BP, listen to all the podcasts and don't worry about an actual salary right now.

David Krulac · Answer

@Edward Ray If you are the owner you can take all of the money left over and do what ever you want. If you have a Corporation as owner, then the IRS might expect you to pay yourself some salary, along with FICA, compensate with your time spent.

Edward Ray · Answer

The positive cash flow I want to invest into another property.I'm new to this.I would like to own at least 10 properties I just need advice on handling the money for maintenance,reinvestment in to the bussiness,and tax purposes.

Patrick L. · Answer

I put every dollar I make from my rentals into buying more rentals. For me it's an investment not my primary source of income. Once I have a need to use my rental income as my spending money then the story may change but the only way to grow your business rapidly is to reinvest. That's how I was able to add a new rental unit every month in both 2012 and 2013. If I had spent most of my cash flow on myself then maybe I'd have 6 new rentals instead of 24 and I'd have a lot less cash every year for the rest of my life.