Seeking advice; Replace high paying job with business income

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Hi,We (me and my wife) have been toying with the idea of replacing one of our W2 income with a business income (aka “lifestyle engineering”). I just wanted to bounce this idea on this forum to see if any of this makes any sense.We are in our mid 30's (with toddler children), and will earn $350K (220K for me and 130K for my wife) this year. We have about $500K in liquid savings, and have 300K equity in our primary residence. In addition, we have cash-flowing 3’plex in central California and an SFR in the Phoenix area. We work in the technology sector in the SF Bay Area. We have the following motivations to do this

  1. While we are comfortable financially, our schedules are very hectic and my wife wants to spend more time with the children. While she is open to quitting her job to be at home, we want to explore a more financially sound way of doing so.
  2. The tech industry can be brutal to middle management in their 50’s. I personally know many people who were laid off at that age, and they were not able to find a job despite stellar qualifications. We want to have a source of income that allows us to retire from W2 jobs in our 50’s if needed.
  3.  Last year we paid $125K in taxes. I would much rather invest my savings to create jobs and reduce our tax burden, rather than pay uncle Sam.

Here are the businesses that we have considered

  1. Preschool: We have seen through or personal experience that there is a tremendous demand for preschools in the bay area. Since our children are young they will also spend time at the preschool/afterschool for considerable time. My wife is looking into getting a site supervisor’s license. Typically, a preschool with an SDE (seller discretionary earning) of $120-$150K sell for $450-500K. We are on the fence about this idea, as it helps us achieve goal #2 and #3, but not #1. With a preschool we are committing to a 7AM to 6PM schedule for a long time.
  2. Farming: We have family in Central California, and know a lot of farmers growing tree fruits and nuts. We have also seen them making a lot of money by expanding their acreage over time. These farmers are close friends and willing to mentor us through the process. A typical almond farm has a profit of $2500/acre, and a 30-40 acre planted field costs $1 million. In this case, our plan might be to buy the farm within 90 minutes from our home and visit it twice a month during the time the crops need basic maintenance like tree pruning. For the few weeks a year when the crops need constant attention, I will stay at the farm and do a long commute to work. This helps us achieve goals 1, 2 and 3. But the investment is significant and there is a steep learning curve.

We are investing in real estate as well, and if we scale it correctly then we should be able to achieve financial independence till the age of 50. But it will not replace our incomes right now, and does not have significant tax benefits if both of us are working full time.

We are not looking at 7-11/Subway/Gas stations as they require constant attention and would defeat the purpose of this exercise.  

Any thoughts or suggestions on our plan is more than welcome.  Thanks

p.s edited to improve formatting

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lovelovingdeals said:   

  1. Farming: We have family in Central California, and know a lot of farmers growing tree fruits and nuts. We have also seen them making a lot of money by expanding their acreage over time. These farmers are close friends and willing to mentor us through the process. A typical almond farm has a profit of $2500/acre, and a 30-40 acre planted field costs $1 million.


what are the costs? it's pretty straightforward to compare farming (as a business) to rental property....not quite so easy with a preschool, which i think it's important to note is not passive income, which it sounds like you want (don't we all). 

i have been able to scale up my real estate holdings to provide an income to match my 9-5, but it took 10 years, a lot of work, a lot of luck, and a natural inclination to that trade.

anyway, i vote "Farming" because it sounds interesting....for me....to read about :-D

Is farming buying the land and taking on the risks of growing and harvesting?

You have explored the preschool and farming. The preschool numbers seem fantastic - perhaps a little too much so, raising my "too good to be true" alarms a little bit. Farming numbers are a little less so, but still really good.
However:
1. None of them are "passive income".
2. Risks, risks, risks.... What are the risks? You have not listed any. Do you know all the risks involved? Are you able to financially withstand the risks materializing in your beginning years when you are still learning?
3. I have personally found small business owners overstate/brag about their income very often. Asking just a couple of questions seem to unravel some of those numbers. Are you able to financially withstand the impact if these numbers don't exactly pan out except for very optimistic scenario?

Taking one step back..
Why not consider something a lot more plain vanilla?
Invest in something like a basket of 20 odd dividend stocks and count the 2-3% dividend as income. It will take a lot more capital. But consider the upsides:
1. Much lower risks than the other approaches you seem to be considering. You are only screwed if the entire US economy is screwed - but can sleep through anything lesser.
2. Completely passive.
3. Eminently achievable within a reasonable time-frame (a decade or so) with your income level.
4. Almost perpetual as long as you rely on only the dividends.
5. Inflation beating.

Anything else you will consider will likely be either much less passive, or have much more active or passive risks involved.


winning so much
Disclaimer
puddonhead said:   count the 2-3% dividend as income

5. Inflation beating.

 

  How is 2-3% return inflation beating?

rufflesinc said:   
puddonhead said:   count the 2-3% dividend as income

5. Inflation beating.

 

  How is 2-3% return inflation beating?


Assuming you live off of dividend - most blue chip stocks typically increase their dividends at a rate > inflation.

It's usually possible, under any market scenario, to compose a portfolio with 2%+ dividend with extremely strong financials and low payout ratios. You can usually do better when the market is lower.

Of course, once you start doing this you may then discover that dividend itself is not a panacea. You may then focus on value stocks with strong financials that does not necessarily pay much dividend. (BRK-B anyone?). But any of that should only be an improvement over a 2%+ perpetual, inflation protected withdrawal rate.

puddonhead said:   
rufflesinc said:   
puddonhead said:   count the 2-3% dividend as income

5. Inflation beating.

 

  How is 2-3% return inflation beating?


Assuming you live off of dividend - most blue chip stocks typically increase their dividends at a rate > inflation.

 

  because dividend is based on value of stock and that increases faster than inflation?

rufflesinc said:   
 
  because dividend is based on value of stock and that increases faster than inflation?


True if you simplify the picture quite a bit (perhaps oversimplify)!

Hence my rejoiner:
Of course, once you start doing this you may then discover that dividend itself is not a panacea. You may then focus on value stocks with strong financials that does not necessarily pay much dividend. (BRK-B anyone?). But any of that should only be an improvement over a 2%+ perpetual, inflation protected withdrawal rate.

Having dividend as your guideline of how much you can withdraw is quite useful, even in many practical scenarios. In most brokerages I can simply ask the dividend not to be re-invested and have a stream of low-tax (qualified dividend) income.
 

puddonhead said:   You have explored the preschool and farming. The preschool numbers seem fantastic - perhaps a little too much so, raising my "too good to be true" alarms a little bit.
 

  
It looks like OP's wife would be buying a $150k, 55 hour a week job (or is it a six day a week job?) for 1/2 million.

I assume that OP knows what's required of the owner/manager and his wife meets those requirements.
Is it possible to get a license and start from scratch, bypassing most of the upfront expense?
It seems like you could start from nothing and be netting $100k within a year or two if demand is high.

lovelovingdeals said:   
3.  Last year we paid $125K in taxes. I would much rather invest my savings to create jobs and reduce our tax burden, rather than pay uncle Sam.

 

  

I'm curious, how does quitting your job and starting a business shelter you from taxes specifically?     Are you talking about some tax benefits you'd take advantage of as a business?    Or reinvesting money in the business rather than taking profit?

 

Looks like you got everything figured out already. Both preschool and farming sound ok. Good luck

I'm seeing some synergy opportunities by combining both business options...you save on labor costs, and the kids get some exercise.

I haven't been involved with farming, but as an outsider, I've seen nothing but uncertainty with farming in CA. From a potential water catastrophe, to overbearing EPA regulations, to OSHA and other safety issues, it seems like an industry rife with uncertainty and potential headaches. I wouldn't be exited at all to jump into that arena.

I've been involved in the daycare thing, and it's very lucrative once it's up and running. You have some pretty significant upfront costs getting things set up. After that, it's pretty cheap to run. Insurance was our biggest output that most people don't think of. In today's environment, you really can't have too much insurance. Labor is a pretty fixed costs and fairly easy to come by in most cases. Other operating costs are pretty fixed. The only real headache is dealing with unreasonable parents. If it's a big enough operation, you can pretty quickly take on a managerial role and not work with the kids at all.

Question regarding daycare. As an outsider there seem to be pretty significant inefficiencies in the daycare market.

Good day-cares are very hard to come by. Those that exist are usually full and close sharp at 5:30 pm. For kids without a SAHM - it is extremely difficult to manage all the schedules involved with the daycare constraints.

I just don't get all of these constraints.

Why don't the daycare providers try to provide more availability, longer hours, more individualized attention etc. to capture the higher end of the demand? They anyway charge $1k+ per kid (more for pre-school aged or lower) while the labor cost seems to be pretty low. So financially - more hours or more individualized service would mean more of low cost labor while charging a lot more $$ from customers.

What's the explanation for all of these lack of space, inflexible hours, lack of availability etc. etc. etc?

puddonhead said:   
Why don't the daycare providers try to provide more availability, longer hours, more individualized attention etc. to capture the higher end of the demand? They anyway charge $1k+ per kid (more for pre-school aged or lower) while the labor cost seems to be pretty low. So financially - more hours or more individualized service would mean more of low cost labor while charging a lot more $$ from customers.

What's the explanation for all of these lack of space, inflexible hours, lack of availability etc. etc. etc?

  clearly we need uber for babysitters. One hour or 12 hours. 24/7 availability. Rates based on demand. Hell, combo it and include pickup and drop off!

I hope you go with the Farming and keep us updated on the progress. I'm eager to learn.

puddonhead said:   Question regarding daycare. As an outsider there seem to be pretty significant inefficiencies in the daycare market.

Good day-cares are very hard to come by. Those that exist are usually full and close sharp at 5:30 pm. For kids without a SAHM - it is extremely difficult to manage all the schedules involved with the daycare constraints.

I just don't get all of these constraints.

Why don't the daycare providers try to provide more availability, longer hours, more individualized attention etc. to capture the higher end of the demand? They anyway charge $1k+ per kid (more for pre-school aged or lower) while the labor cost seems to be pretty low. So financially - more hours or more individualized service would mean more of low cost labor while charging a lot more $$ from customers.

What's the explanation for all of these lack of space, inflexible hours, lack of availability etc. etc. etc?

  I can tell you we tried that, and people don't want to pay.   It costs X to provide the service, so with a reasonable markup, that equates to Y fees.  People want the extra service, but don't want to pay the extra money for it. Also, if you say you close at 5, people inevitably don't get there till 5:30.  Sometimes 6.  Extending the operating hours means you have to reasonably have people there even longer.  That all costs money, and makes it harder to find (good) employees.  We decided what we were willing to provide and made a decision to do only that.  For us, it came down to either working 14 hour days or farming the work out to employees when we weren't there to supervise.   Neither was appealing, so we stuck with core hours we could support.

drodge, thank you for the first hand account.
May we ask which area of the country was it? And what was the approx median income of your customers?

rufflesinc said:   
puddonhead said:   
rufflesinc said:   
puddonhead said:   count the 2-3% dividend as income

5. Inflation beating.

 

  How is 2-3% return inflation beating?


Assuming you live off of dividend - most blue chip stocks typically increase their dividends at a rate > inflation.

 

  because dividend is based on value of stock and that increases faster than inflation?

  The value of a stock is the time value of money expected value of future earnings.

Have you considered buying real estate for sober living homes? Profit margins are excellent. If you want more info please feel free to contact me at knejad@cox.net
Best Regards,
Kamran

Thank you for the informed replies. Some more specifics on the topic:

  1. Preschool: From what I have seen, the only way to make a preschool a hands-off affair is to have gradually expand the number of school locations, and hire competent directors to run them. I have seen first hand cases of folks in my neighborhood who have done that. Of course, it took them 10 years of sweat and tears to get there. The only reason we are even considering a preschool is because we have seen the imbalance in demand and supply in the Bay Area. Many households are forced to be 2 income just to manage the high cost of living, and are forced to chose the only preschool that has vacancies. Schools with creaky buildings and dirty toilets charge $1300/mo for 40 hours a week of childcare for a 3 year old. Decent ones are at $1600/mo. This is not including material fees and other overages like $2/minute late fees if you are late to pick up the child after 6PM. My wife is looking into getting a site supervisor's license to start a single day care. Starting from scratch will be definitely be cheaper, but with the hassle of making sure the facility is compliant for preschool use. This involves dealing with local and state level agencies. The risk here is not being able to maintain steady attendance. ~65% attendance is break even point with an owner director. Also, extremely high liabilities and inability to retain teachers. In addition, making sure all the regulations are strictly followed with a 100 children running around. And the absolute worst case is having an issue of child molestation on your premises (I know of a facility where the Music teacher inappropriately touched the child).
  2. Farming: All the numbers in my assumption have been taken from UC Davis cost studies which are considered to be accurate. The investment is based on current listings of fully planted fruit bearing orchards. Of course this depends on many factors like the type of soil, water table level, rights to canal water, number of residential dwellings on the property to rent out etc. It does sound interesting and appealing, but I have not fully grasped the risks. So far I have only come across people who are in it full-time. I still have to find a person who is doing what I want to do. There are some people who grow wine grapes on 5 acre lots as a hobby, but not almonds or peaches on tens or hundreds of acres.
  3. Saving on taxes: My understanding is that if you draw your income as dividends through a business corporations, then it gets taxed as dividend at a lower rate. I am still trying to wrap my head around this concept, and any pointers would be welcome. On top of that, you can contribute greater amounts as employer and employee to the 401k creating greater tax shelter savings. And then of course there are the usual tax savings of home office, car depreciation etc for use on business
  4. Real Estate/Stocks: Real estate is still not off the table. We have just paused it to look at these options once. 

Thanks once again for the replies. I will keep the group posted.
 

stanolshefski said:   
rufflesinc said:   
puddonhead said:   
rufflesinc said:   
puddonhead said:   count the 2-3% dividend as income

5. Inflation beating.

 

  How is 2-3% return inflation beating?


Assuming you live off of dividend - most blue chip stocks typically increase their dividends at a rate > inflation.

 

  because dividend is based on value of stock and that increases faster than inflation?

  The value of a stock is the time value of money expected value of future earnings.

  That's not what I meant. 2-3% of ... the stock value right? And the stock value should increase at least as fast as inflation

lovelovingdeals said:   

  1. Farming: All the numbers in my assumption have been taken from UC Davis cost studies which are considered to be accurate. The investment is based on current listings of fully planted fruit bearing orchards. Of course this depends on many factors like the type of soil, water table level, rights to canal water, number of residential dwellings on the property to rent out etc. It does sound interesting and appealing, but I have not fully grasped the risks. So far I have only come across people who are in it full-time. I still have to find a person who is doing what I want to do. There are some people who grow wine grapes on 5 acre lots as a hobby, but not almonds or peaches on tens or hundreds of acres.
  2. Saving on taxes: My understanding is that if you draw your income as dividends through a business corporations, then it gets taxed as dividend at a lower rate. I am still trying to wrap my head around this concept, and any pointers would be welcome. On top of that, you can contribute greater amounts as employer and employee to the 401k creating greater tax shelter savings. And then of course there are the usual tax savings of home office, car depreciation etc for use on busines


  
1. I know of people who buy a farm and rent it out.  The ROI is less but it is considered a "safe" investment and is completely hands off.

2. You cannot take all profits as dividends.  Some part of the income will have to be W2.  That is especially true if your wife is managing the day care.  I do know of a lot of people who take very very little salary as compared to the profits.  And none of them have been caught yet.  But, buyer beware.  Google IRS v/s Watson.

    At your income levels, 401k will be a great tax savings.  However, the contribution limit is 53k. If you are already contributing significant amounts via your current employer, the additional benefit may be limited.

    Regarding additional deductions:  Home office is useful if you live in a high property tax/high mortgage interest house.  Make sure you research claiming depreciation of the house as part of those deductions.  I found the rules too confusing (especially what happens when you sell the house at a profit). Will appreciate a post here or a PM if you find definitive answers.  

   BTW, even if you don't own a business, you may be able to claim home-office (especially if you are in IT and you have to provide off-hours support or work with ODCs at night).

   Besides home use, I have found it difficult to find deductions that are both of significant value AND are on the correct side of the gray area.  Car use may or may not be worth the hassle.

It seems you have the knack and the experience to be successful in Real Estate. (Not everyone does)
And you are nowhere near putting too many eggs in the RE basket.
If I were in your shoes, RE option would look attractive to me.

drodge said:   
puddonhead said:   Question regarding daycare. As an outsider there seem to be pretty significant inefficiencies in the daycare market.

Good day-cares are very hard to come by. Those that exist are usually full and close sharp at 5:30 pm. For kids without a SAHM - it is extremely difficult to manage all the schedules involved with the daycare constraints.

I just don't get all of these constraints.

Why don't the daycare providers try to provide more availability, longer hours, more individualized attention etc. to capture the higher end of the demand? They anyway charge $1k+ per kid (more for pre-school aged or lower) while the labor cost seems to be pretty low. So financially - more hours or more individualized service would mean more of low cost labor while charging a lot more $$ from customers.

What's the explanation for all of these lack of space, inflexible hours, lack of availability etc. etc. etc?

  I can tell you we tried that, and people don't want to pay.   It costs X to provide the service, so with a reasonable markup, that equates to Y fees.  People want the extra service, but don't want to pay the extra money for it. Also, if you say you close at 5, people inevitably don't get there till 5:30.  Sometimes 6.  Extending the operating hours means you have to reasonably have people there even longer.  That all costs money, and makes it harder to find (good) employees.  We decided what we were willing to provide and made a decision to do only that.  For us, it came down to either working 14 hour days or farming the work out to employees when we weren't there to supervise.   Neither was appealing, so we stuck with core hours we could support.

  1) thank you for the meaningful response drodge
2) I had no idea that FWF had a "I do not wish to receive PM" setting, until I tried to PM you.

 

As someone who is a business owner in a relatively easy field (I know many others have it WAY worse), I often fantasize about going back to school for a couple years and getting a good job where I'm paid to just show up and can go home after work and not worry about it.

What I'm saying is, the grass isn't always greener.

Your wife is making 130k in a tech job (with benefits/retirement I'd guess), and you're going to spend $400-500k to buy a pre-school business that would hopefully make the same?

Honestly, the best solution, in my opinion, would be for her to find a less demanding job that would give her more time off, even if it paid less. Owning even the easiest to manage businesses is lots of stress - I can't imagine running a pre-school.

rufflesinc said:   
stanolshefski said:   
rufflesinc said:   
puddonhead said:   
rufflesinc said:   
puddonhead said:   count the 2-3% dividend as income

5. Inflation beating.

 

  How is 2-3% return inflation beating?


Assuming you live off of dividend - most blue chip stocks typically increase their dividends at a rate > inflation.

 

  because dividend is based on value of stock and that increases faster than inflation?

  The value of a stock is the time value of money expected value of future earnings.

  That's not what I meant. 2-3% of ... the stock value right? And the stock value should increase at least as fast as inflation

  The stock value will increase with increases in the expected future earnings.

AbbaZabba said:   As someone who is a business owner in a relatively easy field (I know many others have it WAY worse), I often fantasize about going back to school for a couple years and getting a good job where I'm paid to just show up and can go home after work and not worry about it.

l.

Why not both? if your business can be done a lot remotely, then you can do that at work!

Although I can't speak to either exhaustively, as somebody who just served on a Preschool board last year and was raised on a farm, I just gotta question your sanity.  Farming, in any crop I've ever heard of, is back-breaking, exhausting, year round stressful work that has exposure to a crazy amount of  unknowns and peril.  Preschool...you gotta be nuts.  Most unpleasant experience I've had in a long time.  And the preschool basically shut it's doors at the end of the year - not because of controllable factors, but rather parents getting into spats with teachers, teachers quitting and not being able to be replaced, the building ending the lease that we'd had, the only new space we could find that had a reasonable rent requiring a complete rebuild of the fire facilities and bringing everything else up to code, families quitting in the middle of the year, protests against the board...etc etc. 

AbbaZabba said:   As someone who is a business owner in a relatively easy field (I know many others have it WAY worse), I often fantasize about going back to school for a couple years and getting a good job where I'm paid to just show up and can go home after work and not worry about it.

What I'm saying is, the grass isn't always greener.

Your wife is making 130k in a tech job (with benefits/retirement I'd guess), and you're going to spend $400-500k to buy a pre-school business that would hopefully make the same?

Honestly, the best solution, in my opinion, would be for her to find a less demanding job that would give her more time off, even if it paid less. Owning even the easiest to manage businesses is lots of stress - I can't imagine running a pre-school.

  
Ok what field?  (My curiosity peaked when you said "relatively easy")
 

lovelovingdeals said:   Thank you for the informed replies. Some more specifics on the topic:

  1. Preschool: From what I have seen, the only way to make a preschool a hands-off affair is to have gradually expand the number of school locations, and hire competent directors to run them. I have seen first hand cases of folks in my neighborhood who have done that. Of course, it took them 10 years of sweat and tears to get there. The only reason we are even considering a preschool is because we have seen the imbalance in demand and supply in the Bay Area. Many households are forced to be 2 income just to manage the high cost of living, and are forced to chose the only preschool that has vacancies. Schools with creaky buildings and dirty toilets charge $1300/mo for 40 hours a week of childcare for a 3 year old. Decent ones are at $1600/mo. This is not including material fees and other overages like $2/minute late fees if you are late to pick up the child after 6PM. My wife is looking into getting a site supervisor's license to start a single day care. Starting from scratch will be definitely be cheaper, but with the hassle of making sure the facility is compliant for preschool use. This involves dealing with local and state level agencies. The risk here is not being able to maintain steady attendance. ~65% attendance is break even point with an owner director. Also, extremely high liabilities and inability to retain teachers. In addition, making sure all the regulations are strictly followed with a 100 children running around. And the absolute worst case is having an issue of child molestation on your premises (I know of a facility where the Music teacher inappropriately touched the child).

Again, it's nuts.

  1. Farming: All the numbers in my assumption have been taken from UC Davis cost studies which are considered to be accurate. The investment is based on current listings of fully planted fruit bearing orchards. Of course this depends on many factors like the type of soil, water table level, rights to canal water, number of residential dwellings on the property to rent out etc. It does sound interesting and appealing, but I have not fully grasped the risks. So far I have only come across people who are in it full-time. I still have to find a person who is doing what I want to do. There are some people who grow wine grapes on 5 acre lots as a hobby, but not almonds or peaches on tens or hundreds of acres.

You can seriously lose your shirt, even if you know what you're doing.  Look at the upfront costs, the length of time from planting to harvest (which can be decades with certain crops) and the risks (weather, disease, liability) and the truly enormous amount of physical labor involved.  My father still farms - I think of somebody who has multiple skin cancers from exposure, bladder cancer from exposure to pesticides that he's swallowed, missing parts of most digits, and spends 12 hours a day, every single day, in a muddy ditch.  My parents rarely take vacations because of watering and other things that have to be done, and invariably when they are out of town, a pipe bursts somewhere in a back field.  On the plus side, at 72 his muscle tone is better than most 30 year olds.  And wine grapes...don't even get me started.  That's for rich people who don't mind losing millions every year and then call themselves successful when they finally break even after 10 years. 

  1. Saving on taxes: My understanding is that if you draw your income as dividends through a business corporations, then it gets taxed as dividend at a lower rate. I am still trying to wrap my head around this concept, and any pointers would be welcome. On top of that, you can contribute greater amounts as employer and employee to the 401k creating greater tax shelter savings. And then of course there are the usual tax savings of home office, car depreciation etc for use on business

You can pay yourself a reasonable owner draw (probably 50% of your profits is reasonable) and not pay payroll taxes on it (but still pay it on the other half - you still have to pay yourself a salary, and it must be reasonable for the work) For a small operator that's about the extent of it.  As a self-employed person myself, don't get too excited about the deductions...

  1. Real Estate/Stocks: Real estate is still not off the table. We have just paused it to look at these options once. 


Thanks once again for the replies. I will keep the group posted.

  

I don't want to sound too negative, but you posted the 2 things I would least think of as likely paths to your goal - less work and same or more money.  You might make the money, but I am sure your workload would be much higher than it is as salaried person.

Chill99 said:   
AbbaZabba said:   As someone who is a business owner in a relatively easy field (I know many others have it WAY worse), I often fantasize about going back to school for a couple years and getting a good job where I'm paid to just show up and can go home after work and not worry about it.

What I'm saying is, the grass isn't always greener.

Your wife is making 130k in a tech job (with benefits/retirement I'd guess), and you're going to spend $400-500k to buy a pre-school business that would hopefully make the same?

Honestly, the best solution, in my opinion, would be for her to find a less demanding job that would give her more time off, even if it paid less. Owning even the easiest to manage businesses is lots of stress - I can't imagine running a pre-school.

  
Ok what field?  (My curiosity peaked when you said "relatively easy")

  Piqued* 

 

dubs

jaytrader said:   
Chill99 said:   
AbbaZabba said:   As someone who is a business owner in a relatively easy field (I know many others have it WAY worse), I often fantasize about going back to school for a couple years and getting a good job where I'm paid to just show up and can go home after work and not worry about it.

What I'm saying is, the grass isn't always greener.

Your wife is making 130k in a tech job (with benefits/retirement I'd guess), and you're going to spend $400-500k to buy a pre-school business that would hopefully make the same?

Honestly, the best solution, in my opinion, would be for her to find a less demanding job that would give her more time off, even if it paid less. Owning even the easiest to manage businesses is lots of stress - I can't imagine running a pre-school.

  
Ok what field?  (My curiosity peaked when you said "relatively easy")

  Piqued* 

 

  not when "my curiosity" is the subject and not the object

ssgcinty said:   drodge, thank you for the first hand account.
May we ask which area of the country was it? And what was the approx median income of your customers?

  It was in Washington state.   It was an an upper middle class area, mostly tech sector, govt. employees and contractors.  It was 10 years go, but median income back then was probably close to 100k.    We tried to offer extended hours a couple times, but it never made financial sense.  

Why don't you expand your RE business and shift from passive to active participation?

lovelovingdeals said:   

  1. Saving on taxes: My understanding is that if you draw your income as dividends through a business corporations, then it gets taxed as dividend at a lower rate.


  
Sounds like you're talking about C corp, not S corp.
If you own a C corp, like General Motors, the corporation pays income taxes on all profit. That's 15% of the first 50,000, 25% of the next 25,000, 34% of the next 25,000, and 39% of the next $235,000, plus whatever the state hits you for. If you work for the corporation, you should take a salary as a W2 employee, paying ordinary income rates plus FICA and unemployment taxes. Your salary of course reduces corporate income.
Then when profits are distributed to you as dividends, you pay tax on that at long term capital gain rates.

With an S corp, dividends are tax free, they're just a distribution of your own already taxed money.
All corporate income flows to your 1040 at ordinary income rates via schedule E. Again, you should take a W2 salary. The corporate income doesn't get hit with FICA or unemployment taxes but your salary does.

taxmantoo said:   
lovelovingdeals said:   

  1. Saving on taxes: My understanding is that if you draw your income as dividends through a business corporations, then it gets taxed as dividend at a lower rate.


  
Sounds like you're talking about C corp, not S corp.
If you own a C corp, like General Motors, the corporation pays income taxes on all profit. That's 15% of the first 50,000, 25% of the next 25,000, 34% of the next 25,000, and 39% of the next $235,000, plus whatever the state hits you for. If you work for the corporation, you should take a salary as a W2 employee, paying ordinary income rates plus FICA and unemployment taxes. Your salary of course reduces corporate income.
Then when profits are distributed to you as dividends, you pay tax on that at long term capital gain rates.

With an S corp, dividends are tax free, they're just a distribution of your own already taxed money.
All corporate income flows to your 1040 at ordinary income rates via schedule E. Again, you should take a W2 salary. The corporate income doesn't get hit with FICA or unemployment taxes but your salary does.


Thanks. So what you are saying is that if the business is an S-Corp then there is no tax on the dividends for the corporation, but the owner pays ordinary income taxes on all dividends.

For a C-corp there is a corporate income tax on profits, and the dividends are then taxed at a long term capital gain rates.   

bluegreenturtle said:   
lovelovingdeals said:   Thank you for the informed replies. Some more specifics on the topic:

  1. Preschool: From what I have seen, the only way to make a preschool a hands-off affair is to have gradually expand the number of school locations, and hire competent directors to run them. I have seen first hand cases of folks in my neighborhood who have done that. Of course, it took them 10 years of sweat and tears to get there. The only reason we are even considering a preschool is because we have seen the imbalance in demand and supply in the Bay Area. Many households are forced to be 2 income just to manage the high cost of living, and are forced to chose the only preschool that has vacancies. Schools with creaky buildings and dirty toilets charge $1300/mo for 40 hours a week of childcare for a 3 year old. Decent ones are at $1600/mo. This is not including material fees and other overages like $2/minute late fees if you are late to pick up the child after 6PM. My wife is looking into getting a site supervisor's license to start a single day care. Starting from scratch will be definitely be cheaper, but with the hassle of making sure the facility is compliant for preschool use. This involves dealing with local and state level agencies. The risk here is not being able to maintain steady attendance. ~65% attendance is break even point with an owner director. Also, extremely high liabilities and inability to retain teachers. In addition, making sure all the regulations are strictly followed with a 100 children running around. And the absolute worst case is having an issue of child molestation on your premises (I know of a facility where the Music teacher inappropriately touched the child).

Again, it's nuts.

  1. Farming: All the numbers in my assumption have been taken from UC Davis cost studies which are considered to be accurate. The investment is based on current listings of fully planted fruit bearing orchards. Of course this depends on many factors like the type of soil, water table level, rights to canal water, number of residential dwellings on the property to rent out etc. It does sound interesting and appealing, but I have not fully grasped the risks. So far I have only come across people who are in it full-time. I still have to find a person who is doing what I want to do. There are some people who grow wine grapes on 5 acre lots as a hobby, but not almonds or peaches on tens or hundreds of acres.

You can seriously lose your shirt, even if you know what you're doing.  Look at the upfront costs, the length of time from planting to harvest (which can be decades with certain crops) and the risks (weather, disease, liability) and the truly enormous amount of physical labor involved.  My father still farms - I think of somebody who has multiple skin cancers from exposure, bladder cancer from exposure to pesticides that he's swallowed, missing parts of most digits, and spends 12 hours a day, every single day, in a muddy ditch.  My parents rarely take vacations because of watering and other things that have to be done, and invariably when they are out of town, a pipe bursts somewhere in a back field.  On the plus side, at 72 his muscle tone is better than most 30 year olds.  And wine grapes...don't even get me started.  That's for rich people who don't mind losing millions every year and then call themselves successful when they finally break even after 10 years. 

  1. Saving on taxes: My understanding is that if you draw your income as dividends through a business corporations, then it gets taxed as dividend at a lower rate. I am still trying to wrap my head around this concept, and any pointers would be welcome. On top of that, you can contribute greater amounts as employer and employee to the 401k creating greater tax shelter savings. And then of course there are the usual tax savings of home office, car depreciation etc for use on business

You can pay yourself a reasonable owner draw (probably 50% of your profits is reasonable) and not pay payroll taxes on it (but still pay it on the other half - you still have to pay yourself a salary, and it must be reasonable for the work) For a small operator that's about the extent of it.  As a self-employed person myself, don't get too excited about the deductions...

  1. Real Estate/Stocks: Real estate is still not off the table. We have just paused it to look at these options once. 


Thanks once again for the replies. I will keep the group posted.

  

I don't want to sound too negative, but you posted the 2 things I would least think of as likely paths to your goal - less work and same or more money.  You might make the money, but I am sure your workload would be much higher than it is as salaried person.

  Thank you for the candid feedback. I am under no illusions that I can be a farmer after spending 15 years sitting on a computer. One of the options that I am exploring are using farm management companies (similar to property management companies). Of course it drops the ROI, but I get to keep my digits. Do you have any idea about this option.

Skipping 15 Messages...
You both work in tech? I would think your best self employment option would be something within that field, whether that's independent contract work, consulting, etc.....that seems 100x more plausible than daycares and farms, which are both kind of ridiculous ideas, IMO, in your circumstance.

Other than that, if your main concern is job security in your 50s....start plowing huge chunks of money into one of two things....stock market and rental property. With your income, you should be able to have several million stashed away by your early 50s, if you get canned, you'll be just fine.



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