How are you guys handling your money? - Posted by Carlos

Posted by David Alexander on December 31, 2000 at 12:59:02:

Sage is March 1, 2, & 3 … Kiyosaki is holding a seminar in the middle of the month, 23-25, and Creo’s at the end of the money as we know.

I’m going to both sage and CRe for sure, not sure about Kiyosaki’s yet.

I’ll detail out the way I see it later and it is according to the way the codes are setup… not against them… my point is to try and never get audited but in the event I don’t believe I would be saying I did it this way because, I would be saying they are stand alone business’s all acting on their own.

David Alexander

How are you guys handling your money? - Posted by Carlos

Posted by Carlos on December 28, 2000 at 19:20:30:

Hey everybody!!! When you guys do deals and make a profit, where do you put it? Do you have personal financial planners? Do you make yourself an employee of your own Corp. and then give yourself a salary? If so, what happens to the rest of the money? Example:

Company made $200,000 for the year.
Gave myself a salary of $50,000.

How do you handle the remaining $150,000.
I know the answer is do more deals, but where do you put it until then?

Thanks family… :o)


Here’s what I do - Posted by Ron (MD)

Posted by Ron (MD) on December 29, 2000 at 15:29:05:


I’ll tell you what I do and why, but caution you that there may be better ways. Maybe others will offer alternative ideas.

Your main question is what should be done with your profits. Well, I do rehabs, which is very capital intensive. I know that most of the gurus say never to use your own money. Well, I do use my own money because it is much cheaper than hard money which includes a steep interest rate, plus points, appraisal, and many related borrowing costs. Further, even if I’m using other people’s money, I still will pay it back. It’s not like my risk is reduced because I can simply default on loans if I go that route.

So, I take a modest salary and retain other earnings in my corporation for further investment. (By the way, most of my corp’s capital is money it has borrowed from me.) I do have non-real estate investments in mutual funds (including IRAs), and I think it is a good idea to be diversified. But, if I had to choose between one or the other, I would reserve my capital for RE – I make more there than my stocks do (even in good years).

Bottom line, I keep a significant amount of personal cash (loaned to the corp) liquid so that I can operate my rehab business. If you are doing lease options and seller financed deals, you don’t need as much cash as I do and it would make sense to diversify into mutual funds.

Responses to your post got off onto the tangent of corporate structure. Mike talks about generating “legitimate expenses” to reduce corporate profits and, in turn, corporate taxes. Frankly, I don’t get that. I try to minimize my expenses to increase my profits which, in turn, increases my taxes. I hope to pay even more taxes next year.

I do try to avoid taxes where I can. Unfortunately, I haven’t figured out ways to generate “legitimate expenses” that don’t cost me real money. One thing I do do is avoid double taxation and self-employment taxes.

Double taxation occurs when your corp pays tax on profits and then pays you a dividend, which is not deductible to the corp. Any CPA would guide you around that mistake. You just have to be sure you take money out of the corp without using dividends (e.g., salary, rent, interest expense, family salaries, etc.).

I avoid self-employment taxes (as much as possible) by transferring money from the corp to myself without using salary (which incurs a 15% self employment tax) or dividends (which results in double taxation). To do this, my corp pays me a hefty interest rate for the money I lend it (14-15%, which is a legitimate market rate) and a strong rent for my home office space. I still have to pay income taxes on these transfers, but I avoid the self-employment taxes.

I’m sure there’s other, smarter things to be doing, but I haven’t figured them out. Hope this helps.

Ron Guy

Re: How are you guys handling your money? - Posted by MikeRoad RunnerRomeo

Posted by MikeRoad RunnerRomeo on December 29, 2000 at 01:41:04:

If you’re really losing sleep over the 150g’s then set up a self directed IRA or set up another corp & pay it for services rendered. In fact you can owe the other corp enough to stay in the red. Remember you pay taxes on what’s left over after expenses. And remember you can never own too many appreciating assets. There it is. Good Luck!

There’s something you said that… - Posted by IB (NJ)

Posted by IB (NJ) on December 30, 2000 at 23:58:53:

made me remember some things I’ve been thinking about lately regarding RE.

You mentioned that you like to be “diversified” in your investments but make more money in RE than you do in stocks, even in a good year.

I’m a rehabber as well. I’m on my second project and looking for my third. On my first, I made more money that I’ve ever made in stocks (a lot more). And in a far shorter time. And after losing a nice chunk of money in the market this year, I’m convinced that REI (specifically referring to rehabs, flips, etc.) is the best kept secret that America (I’m mainly referring to Financial Advisors, Consultants, etc.) never talks about. I don’t think I’ll ever invest in the market again. Not even in a mutual fund. There’s just too much money that can be made doing a rehab. Not to mention that I have MUCH MORE CONTROL over a rehab than I do a stock.

So my question to you RON is why do you continue to invest in the stock market. Is it just because ‘everyone’ says that your investments should be “diversified”? Keep in mind these are the same guys who never mention RE as the most profitable investment tool ever (if done right). I mean, personally speaking, my idea of diversifying my investments is buying some peoperties to rehab while I may buy and hold others (rentals for that monthly income that can come in handy when buyers are scarce).

I was just interested in your opinion. May you have another prosperous year.

Why a second corp? - Posted by Ron (MD)

Posted by Ron (MD) on December 29, 2000 at 08:57:25:


What’s the point of forming a second company to reduce profit in the first corp? What do you then do about the profit in the second corp?

I understand that if I operate multiple corps I can lower my tax bracket in each. However, in order to avoid double taxation, my long term goal is to break even in my corp, thus paying no corp tax. (I may pay corp taxes for a few years, but over the long term I will show losses to deplete those profits, thereby recovering any corp taxes I’ve paid.)

I know investors sometimes form management companies, but I’m not sure why. Maybe you can explain.

Ron Guy

Re: There’s something you said that… - Posted by Ron (MD)

Posted by Ron (MD) on December 31, 2000 at 07:49:29:

In fact, I don’t “continue to invest” in the stock market. I’ve owned my mutual funds for years, but have not added to them in some time (although they have grown substantially due to the bull market).

For the last few years, all my cash has gone strictly into my rehab business. However, I hope to reach a point soon when my rehab business doesn’t need any additional cash. I try to have 8-12 houses in inventory at any given time. I’m hoping that within a year, I can fund those houses without using my lines of credit. Since I don’t intend to grow my rehab business beyong that volume (1-2 houses per month), I will have no alternative but to put my cash elsewhere, probably the stockmarket.

Intellectually, I like the idea of long-term income from rentals, but emotionally, I’m not sure I want to be a landlord. Also, I would only landlord if there was significant positive cashflow. I don’t want to count on appreciation for my profit. Positive cashflow here usually means lower end rentals ($600 and below). This rental range brings more than it’s fair share of tenant problems.

Having said that, I will say that a big downside to rehabs is that when I stop buying, fixing and selling houses, I stop making money. That’s why owning 10-15 rentals (hopefully fully paid for with 10 years, or so) is appealing.


Re: Why a second corp? - Posted by JPiper

Posted by JPiper on December 29, 2000 at 09:24:55:

Good point…and you’re exactly right. Paying the money for “services” to another corporation simply shifts the profit to a second corporation…which now has the problem.

But further, a second corporation with common ownership should probably be consolidated for tax purposes with the first corporation. If it were only so that you could form multiple corporations to spread income to, so that each would fall within the 15% minimum corporate tax guideline. Unfortunately this is NOT the case.


Re: Why a second corp? - Posted by David Alexander

Posted by David Alexander on December 30, 2000 at 12:35:52:


Not to beat a dead horse on aconversation we’ve had many times, but you can use two corps.

One owned fully by you, and one owned fully by your wife. They are two seperate entities and perfrom seperate functions and will not get thrown together as one corp and have different year ends.

Now you can move money from to the other by way of management, advertising fees etc. and have more time to create more expenses for the second corp, with the monies that would be above that 15% mark.

At least that’s the way we are doing and our CPA has kept the wheels from falling off so far… :slight_smile:

David Alexander

Re: Why a second corp? - Posted by MikeRoad RunnerRomeo

Posted by MikeRoad RunnerRomeo on December 29, 2000 at 14:44:46:

Carlos both of their points are well taken(in context) but focus on my main objective. Primarily, the second corporation should not have common ownership, it should be set up to stand seperately on its own. It should also have expenses and profits of its own. It will have a “strictly formal business” relationship not a personal one with the initial company. i.e.(Formal correspondense and accounting). I assume you plan to make huge sums of money as many investors do, so this will be a long term project. The management company tool is definitely a way to have a seperate entity that transfers profits from the primary corp but again the object is to find legitimate salaries and expenses to incur debt. How and when you set up these entities is very important. You should have specialized legal assistance. You should also have entities to own property seperate from a management and an investment company. If your family is involved they should be part of your multi-corporate structure. So you will soon realize that if you indeed make tons of cash the problem will be how to create legitimate expenses and tax shelter for your cash flow not to mention asset protection. If you need further elaboration or clarity please e-mail me. To Your Success

Re: Why a second corp? - Posted by Carlos

Posted by Carlos on December 29, 2000 at 10:35:38:

Thanks for the input everybody. I’m still somewhat confused on how to best set things up. Ron said something about setting up a management company. If my company made $1 million, can I give myself a $30k salary to show the IRS? How many companies should I set up? Are there any courses that specifically cover this?



Re: Why a second corp? - Posted by JPiper

Posted by JPiper on December 30, 2000 at 14:41:14:

I only have two questions: 1) when did you get married? and 2) when is the audit? Seems to me that the answer to those 2 questions will determine if the wheels come off.


Re: Why a second corp? - Posted by David Alexander

Posted by David Alexander on December 29, 2000 at 15:30:22:

A good place to leanr more about this stuff is they are having a seminar in the first week in March.

David Alexander

Re: Why a second corp? - Posted by David Alexander

Posted by David Alexander on December 30, 2000 at 16:10:20:

Oops… I knew better than to bite this off, this way…

I havent gotten married and speaking in reference of general for folks that are.

Mine are setup a little different and I have more than two… but you also have to remember I dabble in other businesses than RE… I have to do something with my time other than lose arguments with you on the web.

I have corps that or not solely owned by me but completely controlled by me and that gets around the whole can they make it into a controlled group thing.

Hey I guess if I ever get audited and I win you’ll be converted… and until then… well… it’s just all hot air from my side.

I’ve just studied this stuff and finally found a CPA that understands it from my perspective. We are actually going to take him the Sage event with us, if he’ll go.


David Alexander

Re: Why a second corp? - Posted by MikeRoad RunnerRomeo

Posted by MikeRoad RunnerRomeo on December 29, 2000 at 15:59:18:

David’s right that’s a very helpful site to learn from!

Re: Why a second corp? - Posted by JPiper

Posted by JPiper on December 31, 2000 at 11:03:24:

I don’t think you’re losing any arguments…but then again, so far you haven’t put enough information out there to change my mind either.

For example, if I own a corporation and my wife owns another…I don’t think that flies. We do file a joint return. On an audit I think the IRS sees right through that one. And then again, one wonders what happens in a divorce…kind of interesting to speculate on that one not knowing exactly what you have in mind.

In your case though you say that you have corps that are not “solely” owned by you, but yet are completely “controlled” by you. I’d be interested in knowing how you do that in a way that the IRS doesn’t believe it’s a sham.

I think you’re good at thinking “outside the box”. But understand that one area I don’t want to think “outside the box” is taxes. While you may be convinced that your method is foolproof (and it may well be), the IRS may not agree. Unfortunately, you won’t know that until they audit you. The problem with this is that they won’t audit for a while…and during that time any amounts that are disallowed incur interest and penalties. Further, once they rule after an audit your only alternative other than paying is to go to tax court. That gets expensive my friend, so that whether you beat the IRS or you don’t, you lose.

Personally, I don’t want an argument with the IRS. I’m not interested in back interest and penalties, paying tax lawyers…I have better things to spend my money and time on. I don’t want to meet with an IRS agent with an argument like “well, my wife owns this corporation and I own the other one, and they are run at arms length…therefore these deductions that dropped each corporations income into the 15% bracket are legit.”

If a deduction or some type of setup is somewhat specific in the IRS code…then I’m all for it. But for me it better be specific…not just a gray area where I run the risk of making case law. I figure all I win if I’m making case law is some notoriety.

By the way, are you attending the CRE convention? I understand the Sage thing is at the same time.


Re: Why a second corp? - Posted by Road Runner

Posted by Road Runner on December 31, 2000 at 04:57:41:

Rock On Dave!