Retirement provision is complicated for entrepreneurs. You can start a 401(k) plan at your company, but there are strict limits on how much can be included in your portfolio. You can use money to invest in stocks outside of the company in either an IRA or a traditional brokerage account, but that’s cash you’re getting out of business.
Investing in real estate is the best way for you to keep money in business while diversifying your portfolio for retirement. You can reduce the cost of running your business while building wealth for your retirement. Let’s go through the three steps you should take to start using real estate for retirement.
1. Buy real estate
The first step is the most obvious: buy the property. For many companies it makes sense to buy real estate instead of leasing it. Not only do you build equity in an asset instead of spending money on lease payments, but you also retain the tax benefits of depreciation and interest.
You may be wondering if it’s worth buying real estate when you’re running your business from the comfort of your own home. That’s a good question and you need to weigh your options. If your business produces enough cash flow to easily make the lease payment, I think it’s worth it.
First, businesses that you can run yourself from the comfort of your own home usually don’t translate into a big sale. If you buy real estate to work from, you can use the cash flow from the business to build a fortune with some tax benefits.
Speaking of tax benefits, having a property where you work makes it a lot easier to get your taxes done. Setting up a home office is nice, but there are so many rules about what you can do in your home office and what percentage of household expenses you can write off that you get migraines just thinking about it.
Buy a property, work in an office there most of the time, rent out the excess space, and then you can write off all the costs associated with the property and have the property to generate income when you retire walk. win-win-win.
It gets a little more complicated when it comes to making a purchase decision. Formation of an LLC as a holding company for the real estate. You want to separate the entities that own your real estate from those that own your business. Not only is this generally good practice for insurance and liability purposes, but it will later make it easier to sell the business and keep the property.
Find a lender familiar with this process (all of them should be) and run a long-term lease agreement between the operating company and the holding company.
2. Pay off the debt
Real estate investors often make most of their money by paying off debt. They put as little money as possible into the down payment and then have a tenant pay the debt. This also applies to you if one of your companies is paying off a debt for another company.
That’s because you’re replacing a lease payment to a third party with a lease payment to yourself — the company pays the money no matter what, so you might as well use it to pay down debt on an income-generating asset you own.
3. Sell and retire
I was a commercial banker for many years, so I understand the complications involved in selling a business. More often than not, you’ll be forced to sell it for a lot less than it’s worth.
Banks want as much collateral as possible, so they want to include as many assets in the sale as possible. Here you have to make a decision. If you sell the business and property, you may be able to get a nice premium on both and use a tax strategy known as a 1031 exchange to move the proceeds of the property sale into other income-generating assets.
When you’re ready to sell the business to a buyer on an installment basis, things can be easier. The seller pays you regular payments for the business, which provides you with a stream of income and saves you the tax burden. You can also keep the property, enter into a lease with the new business owner and further increase your overall income.