Monday, April 30, 2007
Tuesday, April 24, 2007
How Real Estate Can Fund Your Retirement
Column by Josh Patrick
How Real Estate Can Fund Your Retirement
Looking for a ticket to the good life? Here's why the real estate your company occupies could be more valuable than your actual company.
Most businesses have real estate from which they operate their business. Many times we rent this real estate, and other times we own it outright. My last column talked about the "four boxes" of financial of independence -- and why business owners who also own commercial real estate often have an easier time of reaching financial independence than those owners who don’t own their corporate real estate.
Here's a fact to consider: at some point you will leave your business. And, in many cases, the value of the real estate your business occupies can be more important toward retirement income than the business itself.
If we assume your business has a value of $1 million, you will receive between $600,000 and $850,000 for your business after taxes. This will produce between $30,000 and $42,000 of retirement income per year.
Now let’s assume that you own the real estate that your business occupies. This real estate produces annual rent from the building on a triple net basis of $90,000 per year. (Triple net means that your company would pay all taxes, maintenance, and utilities on the building.) This means that the $90,000 is used to just pay the principle and interest on the building.
If you have owned the building for 15 years or longer, there is a very good chance that the $90,000 you are receiving in rent is going to be yours free and clear when it comes time for retirement, because your mortgage could be paid off.
Many owners we work with will sell their businesses, but keep the real estate and rent it to the new owner of the business. This way, the owner continues receiving the cash flow from the building. Our example above shows that the owner receives more income from his business than from the capital his business produces.
Ownership of the building
You will want to make sure that you own the building as an individual, through a partnership or an LLC taxed as a partnership. If your building is inside your corporation, you often will find there are extra taxes to pay when it comes time to leave your business.
We suggest that having individual ownership of some sort, in a manner that is treated as a sole owner or partnership, is most valuable for you as an owner when it comes time cash out your main business.
Remember, our goal at retirement is to have income sources with as low a tax cost as possible. Having proper ownership of your building is a crucial part of this process. I strongly suggest that before purchasing a building, you talk with a tax attorney and a tax accountant about appropriate ownership options for your real estate.
I often see business owners who did not have this conversation, and find they have a very expensive tax bill 10 or 15 years down the road. If owners spent a few dollars properly setting up their real-estate ventures, they would have saved thousands of dollars in taxes later in life.
Financing the real estate
You may not have saved enough money outside your business for a down payment on your corporate real estate. In many instances, however, your business may be doing very well and could have a large capacity for borrowing more money.
If the business is an LLC, a Subchapter S corporation, a partnership, or individual Schedule C company, we suggest that the owner have the business borrow the needed money, and then distribute that money to them personally for their real-estate purchase. If the company is a C corporation, we will have the company borrow the money and then loan it to the owner.
You will often find that your company has more borrowing capability than you do as an individual. We also find that bankers are more than willing to loan the company money knowing full well that the owner plans to distribute this money for real estate he or she plans to purchase. Since the real estate is planned for business use, your banker will often see this as more collateral for your business loan.
Ownership of real estate should be an important part of your personal financial independence plan. Proper financing and structure are keys to making this plan work. As you look for real estate for your business, find the proper advisers to help you set up and finance this asset. Doing so will serve you well in retirement.
How Real Estate Can Fund Your Retirement
Looking for a ticket to the good life? Here's why the real estate your company occupies could be more valuable than your actual company.
Most businesses have real estate from which they operate their business. Many times we rent this real estate, and other times we own it outright. My last column talked about the "four boxes" of financial of independence -- and why business owners who also own commercial real estate often have an easier time of reaching financial independence than those owners who don’t own their corporate real estate.
Here's a fact to consider: at some point you will leave your business. And, in many cases, the value of the real estate your business occupies can be more important toward retirement income than the business itself.
If we assume your business has a value of $1 million, you will receive between $600,000 and $850,000 for your business after taxes. This will produce between $30,000 and $42,000 of retirement income per year.
Now let’s assume that you own the real estate that your business occupies. This real estate produces annual rent from the building on a triple net basis of $90,000 per year. (Triple net means that your company would pay all taxes, maintenance, and utilities on the building.) This means that the $90,000 is used to just pay the principle and interest on the building.
If you have owned the building for 15 years or longer, there is a very good chance that the $90,000 you are receiving in rent is going to be yours free and clear when it comes time for retirement, because your mortgage could be paid off.
Many owners we work with will sell their businesses, but keep the real estate and rent it to the new owner of the business. This way, the owner continues receiving the cash flow from the building. Our example above shows that the owner receives more income from his business than from the capital his business produces.
Ownership of the building
You will want to make sure that you own the building as an individual, through a partnership or an LLC taxed as a partnership. If your building is inside your corporation, you often will find there are extra taxes to pay when it comes time to leave your business.
We suggest that having individual ownership of some sort, in a manner that is treated as a sole owner or partnership, is most valuable for you as an owner when it comes time cash out your main business.
Remember, our goal at retirement is to have income sources with as low a tax cost as possible. Having proper ownership of your building is a crucial part of this process. I strongly suggest that before purchasing a building, you talk with a tax attorney and a tax accountant about appropriate ownership options for your real estate.
I often see business owners who did not have this conversation, and find they have a very expensive tax bill 10 or 15 years down the road. If owners spent a few dollars properly setting up their real-estate ventures, they would have saved thousands of dollars in taxes later in life.
Financing the real estate
You may not have saved enough money outside your business for a down payment on your corporate real estate. In many instances, however, your business may be doing very well and could have a large capacity for borrowing more money.
If the business is an LLC, a Subchapter S corporation, a partnership, or individual Schedule C company, we suggest that the owner have the business borrow the needed money, and then distribute that money to them personally for their real-estate purchase. If the company is a C corporation, we will have the company borrow the money and then loan it to the owner.
You will often find that your company has more borrowing capability than you do as an individual. We also find that bankers are more than willing to loan the company money knowing full well that the owner plans to distribute this money for real estate he or she plans to purchase. Since the real estate is planned for business use, your banker will often see this as more collateral for your business loan.
Ownership of real estate should be an important part of your personal financial independence plan. Proper financing and structure are keys to making this plan work. As you look for real estate for your business, find the proper advisers to help you set up and finance this asset. Doing so will serve you well in retirement.
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