Pay Yourself!

Pay Yourself!

A landlord shares something he neglected to do when he first started out, which he encourages all landlords to do:

“One thing I neglected to do during my early investing years was figure out what my time was worth. I started this game like many small time ma and pa investors: I did everything except stuff I wasn’t licensed to do (i.e. HVAC, roofing).

I fixed my own toilets, sinks, etc.
I installed my own flooring.
I painted my own walls.
I showed each rental home in person to any and all interested parties.
I took calls and listened to stories that went on for 20 minutes and was told I was rude when I had to hang up.
I even cleaned my own rentals. Ugh!
I also had maxed out at 12 residential rental homes, and it was a rare week when I had one evening free to be home and do stuff with my family and friends. Saturdays I was always at rentals, fixing, installing, sweeping, etc.

In other words, I bought myself a job in addition to my regular full time job. Looking back now, I’m not ashamed of it, but man it took me a long time to see how much that was holding me back.

I also look at my profits from those years: it was almost nothing. Because I was willing to work “for free” I often bought “deals” that weren’t good deals at all and had barely any money left over from rents after the bills were paid. I think I took home about $500 – $1000 per month in those days. That was scant pay for so much work!

Then Brad 20K’s advice to, “Take the tools out of the truck” came along and it changed my life. Since then, our total number of rentals has more than quadrupled and expanded into commercial renting as well.

My take home pay in 2021 exceeded my pay from my regular job. I never could have done this and kept up with all of it had I maintained my old DIY (Do It Yourself) system.

So here are my questions:

Do you pay yourself for the work you do at your rental homes?
Do you feel that you’re making enough profit to justify the hours you put in?
If you were you to hire someone to do your tasks for you, would the amount of pay you take for yourself be enough to cover hiring it out?

CAVEAT: In answering these questions, do not consider equity (sweat or amortization) as pay. Don’t include tax benefits either. The reason is you can’t pay a manager/maintenance man with equity or tax benefits. I’m talking exclusively cash money in the bank/wallet.”

These questions led to a very thought-provoking discussion on our Q&A Forum. Real estate investors from different states and from different points in their investing career shared if, when, and how much they pay themselves and gave their reasons. I would encourage you (all landlords) to read, especially if you are a newer landlord. Seriously, it’s a good chance it will be the most important discussion you will read this month.

Pay yourself? [PA] I pay myself the same amount each month regardless of the number of vacancies or if I have to do a little work or a lot of work. I’m the first thing that gets paid. If the business can’t run doing it that way, then I’m doing something wrong. But it has worked. And it makes personal budgeting a lot easier. I can’t remember the last time I came up on the short end of that equation. I know I’m well ahead. I nibble on projects here and there, but I haven’t been crushed by anything. If I get something that looks like it’s going to take awhile, I hire it out. But I still pay myself as usual.

Pay yourself? [AL] I am not sure if I understand your question. Of course I pay myself, doesn’t everyone? Unlike Paulio though, I am always the last to get paid. All of my hired help and vendors get paid before I do.

Pay yourself? [NY] I grew up with my dads mentality of I am a man and I will do everything myself and everyone we knew did the same thing so it took awhile for me to realize I should do none of the actual work. Now I do none of the work although I do know how to do it so I know what to tell my workers to do if they don’t know how. I don’t even go to Home Depot anymore. I do what I can’t hire done which is I talk to sellers when they call me from my advertising, I believe that buying and putting deals together is the one thing I am better at than anyone I could hire and I check my jobs regularly because that can get out of hand quickly if guys aren’t supervised. I check receipts to make sure that is ok but I have a 70 year old guy who does the shopping and some of the work who I trust. This is my only income and I take out what the household needs, my wife doesn’t have a regular job although she works in the office doing basically whatever I don’t want to or don’t know how to. I make enough to pay the bills including health insurance. I pay my guys good pay for what they do to help keep them available between jobs, before covid I kept guys pretty busy but since covid the work is spotty. I am not putting many hours in at this point so I am doing pretty well although I think when the weather breaks in a couple weeks I will get busy again hopefully, I am bored at this point.

Pay yourself? [PA] Easy to say “contract it out.” In reality, the only way to be sure that the job is not gonna be screwed up is to pay a real pro top dollar—-and I am willing to do the work to pocket that money. I am not talking about paying a helper to assist you, I am talking about hiring a complete professional where you do not need to inspect the job before or after. As an example, replacing a length of cracked sewer pipe in a basement with pvc. Pro plumber is gonna charge me $500. I can do it for the cost of a length of pvc, two rubber couplings and two grinder wheels.

–When you state that the properties were bad deals because you hardly had any money left after expenses, you are ignoring appreciation of the properties. You are also ignoring the effect of inflation on rents and cash flow over time. Generally, “nice” properties in good areas do not have great cash flow, at least in the beginning. You enjoy the appreciation, which is taxed lower than income. As inflation raises rents, and your mortgage payment is fixed, cash flow improves. –68.84.xxx.xx

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Pay yourself? [MO] … the questions are exactly as stated. The answer you gave me is “I pay myself if there’s something left over.” Okay, fair enough. Could you hire someone to replace yourself and still make money? If not, then you bought yourself a job, not an investment property. If yes, then maybe you bought yourself a job and an investment property. Btw, I’m not upset with however you did it, I’m just curious how it’s working out and if you’re happy with it. Also, does it limit your growth? My experience was it severely limited my growth. Maybe yours is different?

Ken, good points all around. I felt the same growing up. My goal these days is to constantly ask myself where I bring the best value. Most times, management and systems are the most valuable thing I bring. Occasionally, I’ll still change a furnace filter if I’m in the hood, but those days are almost done.

Don, I used to think the same way as you. I couldn’t believe Brad’s advice. It took me almost 3 years of gradually removing one tool at a time. First ones to go were brooms, sponges, and mops. I HATE cleaning other people’s filth, so I was never motivated to do it by the peanut wages I “paid” / “saved” myself. Cleaning gal charges $15/hour and does wonderfully, and she get it knocked out in a day…usually the same day I call her. After moving beyond 20 units, I had no choice. There aren’t enough hours in a day to work a FT job and keep up with 20+ units. Btw, I’m not forgetting anything. I already acknowledged those things you brought up, but as I said you can’t pay someone with those things. Those are the “investment” parts of the game, and they may or may not bear fruit. Yes, we’ve had great appreciation lately, but had I sold out 5-10 years after I started, those would not have existed, so I can’t really count them. You may have seen some of my other recent posts (or not) where I have addressed inflation at length. Great stuff for me as an owner.

The bottom line of this post is are we valuing our time adequately? Everyone is going to have a different answer for that. My problem is I didn’t think about it enough early on in my real estate career, but now that I spend more time on it I’ve found my income increasing and hassles decreasing, as they should. Careful human thought applied to worldly problems create a treasure trove of discovery and progress.

Pay yourself? [TX] I like most here used to do it all. Pay? Naw, my goal was to grow my business. If I didn’t have to pay someone else to do X then those dollars could be put into buying the next property. It struck me when I had about 10 properties and 2 vacancies at the same time that I had a property sitting vacant for a month while I was working on the other one. That cost several hundred dollars that I’ll never get back. I could have hired a handy man and cleaning crew for less than half of what I lost in rent. All of a sudden my strategy to not pay others so I could reinvest those dollars was back firing. I was in fact costing me money once my available time was exceeded by the needs of my old way of doing things.
So, I don’t have a problem with people doing their own maintenance. Especially at first so you learn how things should be done. The problem is you have to recognize when that strategy is costing you money.

Now a days I don’t have a day job, time is more available than ever, and money is not an issue. My strategy has changed again, now I only do the work I enjoy doing. If I don’t like doing it then someone else is going to get a job. Age (and longevity in rentals) has it’s advantages

Pay yourself? [NY] I have a guy $30 an hour who can fix most anything but he is getting older so sometimes he says not doing that project but he runs out for me for smaller general maintenance whenever I have a small project in a unit and he does the Home depot shopping for me. A friend has a handyman at about $22 an hour on the books he can fix anything. Either of these guys could fix the cracked sewer line and my friends guy did fix one a couple weeks ago at a house we are selling. I have been able to find reliable guys when needed, if you have enough work hiring a guy full time on the books becomes way cheaper.When i started doing less of the physical work i had more time to find more deals which is the part I like anyway –72.231.xxx.xxx

Pay yourself? [AL] I could hire a property manager to manage my properties but I could not hire a person of my caliber (my clone) to run my business. My clone would require a 6 figure income and if anyone is going to make 6 figures off my properties then that will be me and me only.

You seem to think an investment is something that should operate all by itself without any involvement from the owner. That may be true for investing in the stock market where you have limited control over what happens. However, in what I do and to earn double digit returns above 20%, my business requires constant input from the owner or whomever I hire who has the brains to make it work. I don’t call it an investment per se but more of just a business that needs my management skills to keep the wheels moving and the profits rolling in. One reason I am successful at it is because I actually enjoy being a LL.

Pay yourself? [IL] Your post just punched me in the gut. I am at that same point. My wife and I both work full time jobs and with 3 kids there is always practices, games and misc running to do.

We are up to 24 residential units, mostly C class with a couple B’s sprinkled in. I am constantly working on the evenings and weekends on the rentals. My wife and I just had this conversation that we want to keep growing the business so I’m going to start taking the tools out of the truck. The hardest part of that is going to be my stubborn butt. I always sit there and think, why pay someone $40/hr to do that when I could run over there and knock it out.

I’m starting to see the error in my ways, with a daughter already a sophmore in high school, I’m missing way to much of what is the most important thing….my family.

Pay yourself? [IN] Read “Profit First” by Mike Michalowicz…. You pay yourself, then have sub accounts to cover expenses. Property taxes, insurance, CAP expenses, etc. With that said, yes. But this is a full time job. I don’t work at another job and then do this in the evening….

Pay yourself? [IN] (IN) is spot on. “Profit First” changed our business from day one. If you cannot pay yourself the top 10% first, then your business is not making any money. From there, you can tweak it to your growth. I get paid on Thursday. Got some grief from a few on here…. but it allowed us to grow, fast! Some of it is psychological… kinda like Dave Ramsey’s baby steps.

Pay yourself? [IN] I did work a lot of weekends and evenings trying to get it all going. Had a full time job that made me work OT plus two kids and a spouse. I hired out when I didn’t know how to do it. Then I learned how to do it, if I could. Have had handy guys along the way. Hired a few full on contractors to do bigger stuff. Then the W2 ceased. I didn’t want to take on another one. Started doing this only. Figured out I could still work the same amount of time on the rentals as before so I had extra time available for life. Now as a regular thing I do not work weekends, holidays or evenings. The exception to that rule is when I have a bigger rehab with another stacked behind it. Then I work on Saturdays and spend more than 8 hours a day at it. My typical week is well under 40 hours. This has allowed me to do so much for myself. Hard to find people in the area that are worth the money. Heck I can’t find people with no knowledge who want to learn. The only way I see me not working for my little biz is if I started flipping full time as well. The deals for that have all but dried up. Materials and labor have all increased as much as housing prices.

Pay yourself? [SC] We always have profit, but seldom take money from the business. At least we don’t take it directly. It covers our vehicles, cell phones, some of our insurance, meals, travel, etc. But we have always had outside income that was enough to pay the bills, so we have pretty much always rolled the profit back into the business: another door or upgrades to what we already have.

This strategy allowed us to “retire” at 58. I still work on the rentals, but nowadays I only do the stuff i like to do. I hire out stuff like shingles, yard work, clogged sewer pipes. I still enjoy fixing and maintaining the properties, so I do HVAC, some plumbing, some electrical, and know all my tenants by name (we only have 12 doors). I’ve hired out the cleaning for years! Hate that part.

Pay yourself? [AL] I would have understood this post a lot better if you had titled it,..”How to grow your business while having a day job” Since I have never had a day job since day one, my business model has always been different than others here. Now, I would like to ask you a direct question which could be the topic of another posting here. Is there an ‘ideal business model’ that should be followed if someone wants to grow their business while having a day job and a family to support? It seems like everyone does it differently here. Now, if this ‘ideal business model’ actually exists, then I want you to tell me what it is. Re-read what Otis (IL) said and I think that is typical of how most people try to do it but is there is a better more profitable way to do the same thing?

Pay yourself? [ID] I had to really scrape and save to buy my first rental. There was no money to pay anyone else to do the work. If I would have only purchased real estate that I never had to go and look at for any reason, I never would have been able to get into the rental game. When I could pay to have work done, I often had to go out and re-do whatever had been done because it was done wrong. And today, it doesn’t matter how much I can pay, I can’t find anyone to do the work, No one wants to work and the people with job skills all got old and retired. If you can find a young person who will actually work, he doesn’t know how to do the work. Local handymen want $80 an hour, won’t take any difficult work, work slow as molasses, if they even show up.

Pay yourself? [ID] You know what? Appreciation isn’t something to be sneezed at

Pay yourself? [PA] I pay myself in two separate manners.

1) I do take a owner’s draw that isn’t specific in amount. If I want cash, I just take in and place it in my Quick Books as Owner’s Draw. There is no tax on owner’s draws. You just write yourself a check.

2) I have one LLC that manages the land trust and LLCs that own properties. I do – as the sole employee of that management LLC pay myself roughly 2-6% of the gross rents collected (depending on how the year goes). I do pay self employment tax, FICA and unemployment on this amount, but 100% of this goes into a self directed Solo Roth 401K. The individual LLCs and land trust match that contribution to the 401K. This gets listed in QB as employee salary and benefits.
You are spot on – so many people can’t see the trees when they are in the forest. I am doing this for retirement, not because I like people.

Pay yourself? [KY] Congrats on your growth!! I’ve been away from the forum for a while but would like to know more how you acquired 48 units + commercial. You were always debt averse so wanted to understand how you did it. Kudos.

Pay yourself? [CT] I sub everything out, when I first started with 6 units sure I could do a lot. Now that I have a lot of units I am not a full time handyman, and I don’t dream of being one. Growing cured me of the DIY mentality. Between the rentals and the construction business if I gave up sleep and worked 24/7 I still wouldn’t have enough time to get things done. I think a lot of landlords are not as profitable as they should be. I just refinanced one of my projects with a none recourse FHA loan and they figure hiring a management company right into the properties expenses. For me it was a good lesson seeing how the big boys underwrite properties. You don’t have to do it all at once either, I just started to pay people to do the things I absolutely hated first. For me it was cleaning, I hired a cleaning lady at turnovers. Then I hired painters, etc. Its a process as you grow.

Pay yourself? [KS] I learned everything in reverse order and the hard way. Purchased 30 units in one year during 2008. Hired a management company. Lost tons of money due to management costs. That’s when I learned one of many golden rules – he who has the money (collects the rent$) has the power. The property manager took 10% of collected rents, kept all the late fees and nsf fees, took 50% first month’s rent as a placement fee, plus 12% of repair costs for any work order as a project management,.. then the contractors charged anywhere from $50-$80/hr. I got what was leftover after everyone else got paid and some months nothing was leftover – even with 30 units.

Thought a different manager would solve the problem. Changed managers 4 times in 4 years just to find different issues but the same problem. I wasn’t making $$. The worst – in 2012 I had a property manager selling drugs to tenants. He even took a deceased resident’s opioid prescription to a pharmacy to be filled. That’s how I found out about the nightmare. Police called me saying they had video of my on site property manager in a pharmacy committing a crime and their undercover agents had purchased drugs from residents in my apartment community. They believed my manager supplied my residents with the drugs to resell and he had been taking cuts from the sales in exchange for rent. The police said raids were being planned and my residents may end up being incarcerated. The blood drained from my face. That was the final straw. I’d been losing money – I couldn’t pay myself – couldn’t pay the property taxes and approaching the tax sale date. Now this dateline nightmare? I either sold and walked away with a loss or took on the nightmare. Easiest decision I ever made. I moved into my own apartment community the next day. I could write a book about all the scams, fraud and theft I unraveled. I lived on site for 4 months. Brought it from 65% occupancy to 100%. Cleaned up, booted out, removed, replaced, fixed up, freaked out (often), and finally realized as the owner I was the only person who cared enough to make it work for me. Everyone else made it work themselves. Once I got paid first, everything turned around. I got the taxes paid and caught up,.. went from last to first for in demand properties and I’ve stayed at 100% occupancy ever since.
Flash forward 10 years. I’ll never let someone else manage my properties. I have 40 units. Taxes are all paid in advance. I collect the rents (actually – online management software collects the rents for me and deposits them nicely into my bank while I sleep). I am paid first before anyone else and I take very healthy monthly draws from the LLC. Currently pre-leased through September. Went from broke and behind, about ready to lose everything on a county tax sale,.. to having an insane net worth I could have never imagined. Thinking a property manager cared about me making money was a rookie mistake. Letting someone else do the management work was a mistake.

Regarding maintenance, it’s really hard to find anyone to show up. Or does competent work. I’d like to sub out more maintenance work but good workers are hard to find in my small town and not enough people are going into the trades. All the landlords in my area are DIY because there’s no good help. The only electrician I can get to show up on time wants $100/hr so I do most minor electrical. My plumbers/HVAC pros charge $90/hr plus a $79 fee just to show up. So I do a lot of the light plumbing and save the more difficult jobs for them. Anything that hints of liability or large labor needs (roofs, electric panels, drain line collapse, etc.,) I call the pros who have liability coverage and manpower. That’s maybe 10-15% of the repairs.

The result of doing the easy repairs, doing my own turns, painting and cleaning,.. has been worth it. On average I’ve added $70k annually to my bottom line and only work maybe 2-5 hrs a week on maintenance. If there’s a turn, I work 4-6 hours a day for 3-4 days in a row. Average 10 turns a year so not that many days. I can do a turn in 3-4 days. When I hired it out it often took 1-2 weeks for them to fit in with their other jobs. I lost rents waiting for the work to be done and lost control of the move schedule $$. I would have to pad the schedule for the new tenant just in case there were delays with the hired help. When I took over, I narrowed that timeline down to 3-4 days. This has also added to my bottom line revenue.
Golden rule in maintenance, do it right the first time. Period. Don’t use cheap materials, supplies or parts. Never. Or you’ll be doing it twice. Which takes you back to golden rule number one in maintenance – do it right the first time.

So, yes, I have a part-time job but it pays well and there are lots of benefits of being inside units doing inspections, checking for unreported “fluffy” animals, chatting with residents, growing referrals. It’s a small inconvenience for a pretty good payback.

Probably have battle scars from trusting other people with my money in the beginning. Lots of lessons learned. Not saying that this is the best way or the right way for anyone else but for my small town and just 40 units, I wouldn’t do it any differently.

Pay yourself? [IN] I bought a job. This is a great discussion. Turns out when Covid shutdowns happened something dumb happened in my brain and I bought a service van for all my tools. Now I have a full time job maintaining my rentals and I do not pay myself. It is the dream I had 20 years ago when I was working for other landlords and busting my but to get here but really a job is not what I envisioned. I am even mowing 5 of my properties short term.

Pay yourself? [MI] I pay myself the following.. Taken out of my rental bank account automatically every month:

1. 500 month roth ira for me
2. 500 for my wife’s roth
3 300 for kids mutual fund
4. 700 on the 5,10,15,20, an 25 of each month into mutual funds

Soon to be changing when I go to full time landlording.

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