Planning for retirement is difficult for business owners. You can start a 401(k) plan at your company, but there are strict limits on the amount you can receive in your portfolio. You can use the money to invest in stocks outside of the company, or in an IRA, or in a traditional brokerage account, but that’s cash you’re taking out of the business.
Investing in real estate is the best way to keep money in the business while diversifying your retirement portfolio. You can reduce the cost of placing your company while building an asset for your retirement. Let’s take a look at the three steps you need to take to use real estate for retirement.
1. Buy real estate
The first step is the most obvious: buying real estate. For many businesses, it makes sense to buy real estate instead of renting. Not only do you build equity in the asset instead of spending money on lease payments, but you also retain tax benefits on depreciation and interest.
Here you may be wondering if you should buy real estate if you easily run your business from home. This is a good question and you will need to evaluate your options. If your business has enough cash flow to easily make the lease payments, I think it’s worth it.
First, usually a business that you can easily run from home on your own does not translate into a large selling price. If you buy real estate to work, you can use the cash flow from the business to create an asset with some tax benefits.
Speaking of tax benefits, owning a property where you work will make paying your taxes much easier. Setting up a home office is fine, but there are so many rules about what you can do in a home office and what percentage of your home expenses can be written off that you can get a migraine just thinking about it.
Buy real estate, work in an office most of the time, rent out the extra space, and then you can write off all the real estate expenses and have the property for income when you retire. Win-win-win.
Things get a little more complicated when you’re making a buying decision. Form an LLC to be a real estate holding company. You want to separate the entities that own your real estate from those that own your business. Not only is this good practice for insurance and liability purposes, but it will also make it easier to sell the business later and keep the property.
Find a lender that is familiar with the process (they all should be) and work out a long-term lease between the operating company and the holding company.
2. To pay the debt
Often, real estate investors make most of their money by paying off debt. You put as little money as possible in the down payment and then have the tenant pay the debt. This will be relevant to you even if one of your companies is paying a debt to another.
This is because you’re replacing a lease payment to a third party with a lease payment to yourself – the business pays the money no matter what, so you might as well use it to pay off the debt on a profitable asset you own.
3. Sell and retire
I worked as a banker for many years, so I understand the complexities involved in selling a business. In most cases, you will be forced to sell it for much less than it is worth.
Banks want to get as much collateral as possible, so they want to include as many assets as possible in the sale. Here you need to make a decision. If you sell a business and property, you can get a nice premium on both and use a tax strategy known as a 1031 exchange to shift the proceeds from the sale of the property into other income-producing assets.
If you are willing to sell your business to a buyer with installments, things can be easier. The merchant pays you regularly for the business, providing you with an income stream and avoiding tax issues. You can also keep the property by entering into a lease agreement with the new business owner and further increase your overall income.