If you’ve been following us for a while, you’ve likely heard us stress the importance of operating your real estate venture as a business. We mean that legally—your real estate business should be a real, government validated business like an LLC.
If your rentals are a business, that makes you the boss, which means you get to determine how much of your profits go into your pocket! Sounds awesome, right? It is, but the reality is, this can be confusing, overwhelming, and no one really talks about it.
Paying yourself is going to look different for every single investor. How much you make is going to depend on your personal situation, but today we’re going to highlight a few different things you should consider before you click confirm on your online bank transfer.
Getting a Business Checking Account
Having a business account is key. Because your LLC has an EIN, you’ll need a specific account made for businesses. When we first did this, we simply opened an account at our existing bank. Rookie mistake. Especially if you’re working with a big bank, this is probably not the best choice. Big name banks charge big fees. You can more about choosing business banking products on the podcast.
Shop Local (or Online)
Remember, every single expense comes out of your ROI, so you’ll want to shop around and get the best bang for your buck! We were able to find no fee business checking accounts at a small, local bank. You can also find some great business checking accounts online, provided that you’re okay with not being able to go to a physical branch to conduct your transactions. Some banks will offer a low or no fee account dependent on minimum balances or number of transactions. Call a few local banks in your area, or check out Bankrate.com to find an account that fits your specific needs.
Don’t Break the Rules
Now that you’ve got your business bank account set up, be sure to follow the rules so you don’t get in trouble with the IRS. A business account is not intended for personal use, so don’t use your business debit card the next time you hit the Starbucks drive-thru (unless of course, this is a business expense and you can prove it). Keep track of all of your receipts, make sure all real estate related expenses are coming out of this account. The rent that you receive every month should be deposited into this account.
Expenses are a part of any business, and real estate is no exception. This might seem obvious, but what you personally make from your business can only be calculated from what your business makes after expenses. You’ll need to factor in vacancies, repairs, expenses, management fees, insurance, property taxes, and more. You do not want to pay yourself the entirety of rent that your business is earning, or your business will quickly be in the red. Meet with a real estate savvy CPA to discuss making the numbers work, or at the very least, put together a spreadsheet. We always recommend being conservative with your numbers so there are no surprises.
Assessing Your Situation
How much money you decide to personally make from your real estate business is a very personal decision. This can depend on many factors. Do you have a loan you need to pay off? What is your investment strategy? What season of life (and business!) are you in? If you’re just starting out and need the extra income to make ends meet, you might be inclined to take a larger chunk of cash flow for personal use. If you’re focused on portfolio growth, you might want to take very little so you can reach your goals at an accelerated rate. Just be honest with yourself, and know that this number can change over time.
How to Get Paid
Once you’ve decided on a number, you can transfer those funds to yourself. You could write a physical paper check, set up an online banking transfer, or automate your transfer. Be sure to mark your transfer as distribution or owner pay. If you want to learn more about how we use our money, check out this episode of the podcast.
A Word About Taxes
Regardless of what you choose to make from your business, you will pay income tax on the total net income. Since an LLC is a passthrough entity, taxes are calculated on your personal tax return. This is why we’re huge advocates of making repairs and expenses in our business!
Getting in the Right Mindset
I know this seems complicated, but don’t get bogged down in the details. Don't let this stop you from taking action and building financial freedom. Take it one step at a time, and contact your CPA if you have questions about how to do it right. And remember, like most things in finances, this is not one-size-fits-all. Don’t try to replicate someone else’s path; do what works for you!