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Real Estate: A Great Option for Long-term Growth and Strategic Investment
I am often asked by many of our business owners where else they should invest to ensure they will have enough money to live off of in the future. All have successful businesses that are the bulk of their net worth and are looking for ways to diversify their assets. A lot of people think of real estate as not growth-oriented enough and too cumbersome to deal with in the long term. In other words, it is boring and seen as a nuisance asset rather than one oriented toward capital growth and financial freedom.
While it is true that real estate can be somewhat capital intensive and have a relatively low return, there are a lot of upsides for property ownership for the long-term investor.
Four Reasons Why Property Ownership is a Worthy Long-term Investment
#1. Cash use is low
Most real estate is financed with a loan from the bank so the outlay of cash initially is not nearly as significant as the price of the asset – 20% for owner-occupied business and 30% for purely investment property. The cash utilized during the year is significantly less than you would spend on most business endeavors. Also, remember that lease agreements always come with annual escalations that are typically 3% – 5% per year while a fixed rate mortgage from a bank will have a fixed interest rate for up to 30 years of the loan. Even with the Federal Reserve’s recent increases to interest rates and with their indication that we may have two more increases in the coming year, It still is a good time to invest in commercial property. This is especially true if you are able to purchase and close before interest rates climb any further.
#2 Tax benefits are optimal
Real estate has the tax benefit of depreciation that makes it a positive cash flow but a tax loss creating the optimal scenario for your personal and business income taxes. Keep in mind you can deduct any valid business expenses related to the management and service of your property. These tax benefits continue for as long as you own the property even if you no longer occupy the space for your primary business.
#3 Equity can be cashed-in or becomes a stream of income
Real estate also makes the business owner into a forced savings as each monthly payment reduces the principal outstanding on the loan, therefore building equity in the property that can either one day be cashed-in or provide a stream of income in the future as a rental.
#4 Offers a great option after business exit
As the business owner moves into exiting their business they can become an “active participant” in their real estate asset and therefore recognize more tax benefit from their ownership. Many former business owners that have sold their business and have transitioned to management of their commercial property enjoy the minimal involvement that real estate can provide if you have a long-term tenant and a building that is in good condition.
If you are considering the purchase of a building as part of the overall management of wealth contact The Fahrenheit Group and let us help you with your strategic plan.
About the author: Mike Duncan is an experienced CFO, Controller and Senior Consultant that brings nearly 18 years of expertise as an Accounting and Financial Executive to Fahrenheit’s clients. With a broad range of experience in accounting, auditing, processes and controls, and finance across several industries, Mike helps companies assess and improve their finance and accounting functions, focusing on people, processes and systems. He also serves as the CFO for several high growth companies as well as provides litigation support and accounting related consulting services. Email Mike Duncan.