The hurdle is high to make a Corp worthwhile for many w2 workers. The return on whatever capital you put into your own business would have to replace both your w2 income/benefits plus whatever that capital was earning passively while you worked. Most startup biz can't do that for a long time. A private Corp you can invest in (but run by someone else competent) makes a lot of sense though.
Real Estate Economics and Personal Finance
- Thread starter panda
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Paris167
New member
Interesting topic. I think many Americans in general believe that it's either a job/w2 or you are a small business owner or you own income properties. I am a big proponent of diversification as the building block to wealth.
My husband and I both work"jobs" - he's a W2 employee in corporate America, I am a partner in a medical practice. So technically we both have a certain subset of skills and utilize these skills everyday, and enjoy it. But we also own rental properties within a LLC (outside of the state of California for obvious reasons) and have an Scorp for small business. The small businesses are run by employees and is well managed. And I have to say that getting involved in a small business was the biggest risk which for us has reaped the greatest rewards in asset building and additional cash flow. But it took a lot of work to get the business up and running, a lot of sweat and sleepless nights. But once up and running, it's independent and probably now looking back one of the best decisions we made. We definitely support Scorps as a wealth building tool and plan to expand this investment avenue but from personal experience it's not easy to embark on it and you often have to be a risk taker and not afraid to just go for it. And no you don't have to have a huge amount of liquid cash to get started - remember that the founder of Spanx Sarah Blakely started with just $5k dollars in her "idea" and Her net worth is now over $1 Billion.
Scorps definitely come with additional responsibilities. No we are not at the businesses daily or weekly but we have to deal with employees and all the headaches that come with that. I know many people that just want a salary and don't want to deal with these additional headaches. So in the end to each their own. Everyone has different goals, aspirations, lifestyle visions so just do what makes you happy.
My husband and I both work"jobs" - he's a W2 employee in corporate America, I am a partner in a medical practice. So technically we both have a certain subset of skills and utilize these skills everyday, and enjoy it. But we also own rental properties within a LLC (outside of the state of California for obvious reasons) and have an Scorp for small business. The small businesses are run by employees and is well managed. And I have to say that getting involved in a small business was the biggest risk which for us has reaped the greatest rewards in asset building and additional cash flow. But it took a lot of work to get the business up and running, a lot of sweat and sleepless nights. But once up and running, it's independent and probably now looking back one of the best decisions we made. We definitely support Scorps as a wealth building tool and plan to expand this investment avenue but from personal experience it's not easy to embark on it and you often have to be a risk taker and not afraid to just go for it. And no you don't have to have a huge amount of liquid cash to get started - remember that the founder of Spanx Sarah Blakely started with just $5k dollars in her "idea" and Her net worth is now over $1 Billion.
Scorps definitely come with additional responsibilities. No we are not at the businesses daily or weekly but we have to deal with employees and all the headaches that come with that. I know many people that just want a salary and don't want to deal with these additional headaches. So in the end to each their own. Everyone has different goals, aspirations, lifestyle visions so just do what makes you happy.
panda
Well-known member
Paris,
Thanks for sharing. You guys seem to be in the fast lane to become financially independent and look to be great shape financially. You have a profitable S-Corp which is treated like an investment vehicle just like your real estate and equities. You also have a portfolio of rental properties that is generating passive income for you that you can transfer down to your next generation. I would guess that your SCorp is growing at a faster rate that your real estate investments and equity positions over a longer term horizon.
One of the great benefits of an SCorp vs W2 is the tax shelter. The two greatest tax benefits providing by the IRS to us are to 1) business owners since they create jobs and 2) real estate investors as they create housing.
Suppose you make $100k in your W2 job. Your paycheck will be taxed : Federal, State, Medicare, and Social Security right off the bat. Both Medicare and Social Security accounts for 15.3%, therefore $15,300 in FICA taxes. As a Software consultant who makes $100k, he can pay himself a W2 of $30,000 - $50,000 and rest will be considered as K1 which will flow in your personal 1040. You are now paying Medicare and Social Security on the $30k - $50k rather than the full $100,000. Once your K1 (net profit) flows into your personal taxes you can now offset this income from any real estate losses you incur via your schedule E. Depreciation on your rental properties is a very nice thing to have.
Thanks for sharing. You guys seem to be in the fast lane to become financially independent and look to be great shape financially. You have a profitable S-Corp which is treated like an investment vehicle just like your real estate and equities. You also have a portfolio of rental properties that is generating passive income for you that you can transfer down to your next generation. I would guess that your SCorp is growing at a faster rate that your real estate investments and equity positions over a longer term horizon.
One of the great benefits of an SCorp vs W2 is the tax shelter. The two greatest tax benefits providing by the IRS to us are to 1) business owners since they create jobs and 2) real estate investors as they create housing.
Suppose you make $100k in your W2 job. Your paycheck will be taxed : Federal, State, Medicare, and Social Security right off the bat. Both Medicare and Social Security accounts for 15.3%, therefore $15,300 in FICA taxes. As a Software consultant who makes $100k, he can pay himself a W2 of $30,000 - $50,000 and rest will be considered as K1 which will flow in your personal 1040. You are now paying Medicare and Social Security on the $30k - $50k rather than the full $100,000. Once your K1 (net profit) flows into your personal taxes you can now offset this income from any real estate losses you incur via your schedule E. Depreciation on your rental properties is a very nice thing to have.
Paris said:
panda
Well-known member
I am not big fan of Whole Life insurance or a Variable Universal Life Insurance or any variable life insurance products. I do not believe that Insurance and Investments should be mixed.
There are only two situations where I am in favor of Life Insurance. #1 is a Term Life Insurance to insure the breadwinner who is just starting to build assets and #2 is Life Insurance as estate planning tool for the Upper Class Millionaires with a net worth greater than $5M.
There are only two situations where I am in favor of Life Insurance. #1 is a Term Life Insurance to insure the breadwinner who is just starting to build assets and #2 is Life Insurance as estate planning tool for the Upper Class Millionaires with a net worth greater than $5M.
peppy said:
Cornflakes
Active member
Amen.
If you take the monthly $ diff between whole life and term life premiums, and invest money in a 'random' stock/mutual fund, you'd come out ahead over 30 year term.
The way you pick random is, throw a dart each month on a wall where you have arbitrarily picked stocks/funds.
Just saying...
If you take the monthly $ diff between whole life and term life premiums, and invest money in a 'random' stock/mutual fund, you'd come out ahead over 30 year term.
The way you pick random is, throw a dart each month on a wall where you have arbitrarily picked stocks/funds.
Just saying...
Panda said:
panda
Well-known member
Qwerty, this is just an example where we can double the number to 100k w2 and 100k k1. This can be applied to any small business owner whether he is a software developer or some one who has a Computer repair business. My wife is a cpa and I also have a very good local cpa I have used for 4 years. The advice I have recieved is a reasonable salary. As to what is a reasonable salary for what you do, consult with your cpa.
Cornflakes
Active member
This is pretty interesting topic. Thanks panda for starting it.
I somewhat agree with panda's viewpoint that JOB is legalized slavery. I have a job myself, nowhere close to where Bullsback probably is but a decent 6-figure. My thoughts on big corporations are that each employee, whatever the skills and professional level (entry level to executive) are paid fraction of what they produce for owners aka shareholders. Say, in my company, a GM is very capable guy and makes a $3M comp a year. He will be over Penta mark for sure. And, he is very smart, capable guy of course. But, he probably generates $30M (or 50M or 100M) for the owners. So, he works all the crazy hours, scarifies a lot on personal and family life, probably takes hit on health, etc only to give away vast majority of his output.
Sure 3M is very nice comp, but the guy is capable of producing 10 times or even more. So, why does he keep doing it? LOW RISK. With the job, it is the investor who is taking the risk and my boss does not have much skin in the game for his nice comp.
The same goes for Director, Manger, Engineer and all.
I see the point Bullsback is making that buying up a business and running is no sure bet. lot of risks involved to keep bigger chunk of pie to yourself.
The way I see it, one has to get in the game early when there is appetite for taking risk. I have this vision that once my kids graduate from college, I will urge them not to join corporate jobs for 2-3 years. Make an attempt at starting something of their own and see if it sticks. If they have that executive potential, it will show in whatever they start and they will be much more successful in life than 9-to-5.
I somewhat agree with panda's viewpoint that JOB is legalized slavery. I have a job myself, nowhere close to where Bullsback probably is but a decent 6-figure. My thoughts on big corporations are that each employee, whatever the skills and professional level (entry level to executive) are paid fraction of what they produce for owners aka shareholders. Say, in my company, a GM is very capable guy and makes a $3M comp a year. He will be over Penta mark for sure. And, he is very smart, capable guy of course. But, he probably generates $30M (or 50M or 100M) for the owners. So, he works all the crazy hours, scarifies a lot on personal and family life, probably takes hit on health, etc only to give away vast majority of his output.
Sure 3M is very nice comp, but the guy is capable of producing 10 times or even more. So, why does he keep doing it? LOW RISK. With the job, it is the investor who is taking the risk and my boss does not have much skin in the game for his nice comp.
The same goes for Director, Manger, Engineer and all.
I see the point Bullsback is making that buying up a business and running is no sure bet. lot of risks involved to keep bigger chunk of pie to yourself.
The way I see it, one has to get in the game early when there is appetite for taking risk. I have this vision that once my kids graduate from college, I will urge them not to join corporate jobs for 2-3 years. Make an attempt at starting something of their own and see if it sticks. If they have that executive potential, it will show in whatever they start and they will be much more successful in life than 9-to-5.
Cornflakes
Active member
Panda said:
Panda, as you know everyone's numbers could be off somewhat but here is what I have observed from my recent tax returns.
Fed tax bil ~ 17% of gross
State tax bil ~ 7%
FICA is ~7%
Depending on how much one puts away into 401k, what kind of insurance premiums they pay, and how much all other deductions, your total 'bleed' % could be anywhere between 25 to 35%.
I'd imagine it would be similar for S-corp owners. But, they get to keep most of what they produce. Most of what I produce, goes straight to to those billionaire investors who cut me w2.
Paris167
New member
Cornflakes said:
It is a lot of risk. I remember our very first business we bought was a failing one. It was the only way to buy it cheap enough to "afford" it. But it was initially a "failing" business so we were fronting $15k out of our own pocket every month just to keep it afloat. So there was an immense amount of pressure to get it successful fast or it would literally make us bankrupt. I can't imagine doing it without both of us having jobs that brought in a steady income because there are entrpreneurs that go all into a business and have no back up income coming in. And I thank my lucky stars because for some no matter how hard they work they cannot make a business successful due to external factors out of their control.
But when you look at the bios of some of the most successful entrepreneurs out there, NO ONE just started out with immense success. Often they fail many times before they find that one successful venture that opens doors. If you are willing to take the risk and embark on the journey of entrepreneurship you have to be able to "be okay" with the risks, and "be okay" with the failures. Ultimately I believe we have one life and you have to be passionate about what you do everyday. It's okay for some people to have a 9-5 job if they love what they do. No matter how many side businesses I have going on or even if I happen to "win" this Saturday's power ball
I would always practice medicine because it's my passion - I love what I do and didn't train for 13+ years after high school for nothing. But for those that go to work everyday and hate it I say if you do something you are passionate about at the end of the day you will always be successful because you'll go through life content and fulfilled.
panda
Well-known member
As a W2 employee, these are the Low end and High end targets by age for your 401K retirement savings. If you are a Corp or a small business owner, these target numbers can be substituted as your SEP, Solo 401k, SIMPLE, ROTH IRAs. This number should be part of equity asset allocation. The asset allocation that I feel comfortable with equities is between 20-25% of my entire net worth. Usually closer to the low 20s. The reason for this is that I can control my businesses and real estate, but no one can fully control the stock market.
I personally like to have all of my high paying dividend stocks in a tax deferred retirement investment account and a low fee Vanguard index 500 fund in non-tax deferred accounts.
There is good debt which is a mortgage on your house or mortgages you have against your rental properties. Bad debt is your large credit card bill or financing a depreciating asset like a brand new car. The key to sleeping well while you are in debt is knowing that you can repay the debt. When you buy investment properties, your tenants will repay your debt over time if you buy and finance wisely. The surest way to become a millionaire with real estate is to borrow a million dollars, buy property, and then pay it off. Even if the property never appreciated, you would have a equity net worth of $1,000,000 in real estate.
As you age and get closer to your retirement age your debt / cash ratio should decrease over time. Your goal as you enter into your early retirement years is to own all of your income properties free and clear which will pay you a passive income for life.
A 600% debt to cash means that you have $600,000 of mortgage debt vs $100,000 in cash in the bank. A 100% debt to cash ratio mean $100,000 in mortgage debt vs $100,000 cash in the bank.
I personally like to have all of my high paying dividend stocks in a tax deferred retirement investment account and a low fee Vanguard index 500 fund in non-tax deferred accounts.
There is good debt which is a mortgage on your house or mortgages you have against your rental properties. Bad debt is your large credit card bill or financing a depreciating asset like a brand new car. The key to sleeping well while you are in debt is knowing that you can repay the debt. When you buy investment properties, your tenants will repay your debt over time if you buy and finance wisely. The surest way to become a millionaire with real estate is to borrow a million dollars, buy property, and then pay it off. Even if the property never appreciated, you would have a equity net worth of $1,000,000 in real estate.
As you age and get closer to your retirement age your debt / cash ratio should decrease over time. Your goal as you enter into your early retirement years is to own all of your income properties free and clear which will pay you a passive income for life.
A 600% debt to cash means that you have $600,000 of mortgage debt vs $100,000 in cash in the bank. A 100% debt to cash ratio mean $100,000 in mortgage debt vs $100,000 cash in the bank.
panda
Well-known member
These are ambitious target figures for those who are in the top 10% in the net worth category in the United States in terms of age range, income, and net worth:
They are the households who take action and control of their finances rather than complain about an unfair system. If they are working in corporate america, they are maximizing their 401k, maximizing their employer matches, and IRA every year They are the households who save an additional 20% or more after taxes an 401k/IRA contribution. They are the households who take calculated risks through investments in various asset classes and build multiple streams of active and passive income. When it comes to their personal finance, they look at the forest and not the tree.
Does your profile currently fit into the chart above by age, income, and net worth?
Panda said:
These are ambitious target figures for those who are in the top 10% in the net worth category in the United States in terms of age range, income, and net worth:
They are the households who take action and control of their finances rather than complain about an unfair system. If they are working in corporate america, they are maximizing their 401k, maximizing their employer matches, and IRA every year They are the households who save an additional 20% or more after taxes an 401k/IRA contribution. They are the households who take calculated risks through investments in various asset classes and build multiple streams of active and passive income. When it comes to their personal finance, they look at the forest and not the tree.
Does your profile currently fit into the chart above by age, income, and net worth?
Those are some pretty optimistic growth assumptions. How do you go from NW of $100k to $300k in 2 year (earning $100k)? What exactly are your assumptions?