Becoming your own landlord can boost your retirement income

Why investing in real estate can boost your retirement income. BY KATHY KRISTOF

Buying a house and paying it off can be one of the best ways to get ready for retirement. So, can you buy even more property?

Yes, investing in real estate is complex and risky, as last decade’s housing meltdown amply demonstrated. But if you have money to spare, consider buying your office building instead of renting it, or snapping up other properties. Becoming your own landlord can help you manage your company’s expenses—no negotiating leases or sudden rent hikes—and your tax bills. In the long term, owning rental properties also means you’ll have a steady source of income once you retire. A recent survey of 300 business owners, conducted for Inc. by business-credit site Nav.com, found that 27 percent of respondents had rental real estate investments.

“There are a lot of advantages to investing in real estate,” says Jim Doan, founder of a 150-person San Diego–based mortgage brokerage (and part-time investor in Hawaiian rentals). “If you’ve successfully run a business, you have all the skills you need to manage rental properties.”

Trim Your Taxes

While 37 percent of the business owners surveyed by Nav.com who had rental real estate investments said they were doing it solely for the income, the vast majority said they expected a number of benefits, including tax breaks. “Real estate is the last effective tax shelter out there,” says Lou Vlahos, a Uniondale, New York, tax attorney for business owners. “The income you can earn from rent, the ability to borrow against the property, and the tax deductions all provide benefits you can’t get with most assets.”

If you buy your company’s office building, you can benefit from both property appreciation and, conversely, tax savings from depreciation: Since most of the business equipment that you buy slowly wears out, declining in value every year, the government allows you to write off this gradual loss in value, or depreciation, against your corporate income tax. These deductions are particularly attractive because they’re a paper—rather than a cash—expense, so they reduce your tax bill without cutting into your spending power.

Real estate generally does not decline in value as a tractor or other equipment does, but the IRS still allows you to depreciate it over a long period of time (39 years for commercial property). You get to depreciate the cost of the building only, not the land—so if you buy an office for $1 million on land worth $200,000, your annual depreciation deduction would be 1/39th of $800,000, or roughly $20,500.

Approach these deductions with care if you want to avoid IRS hot water (or the type of public scrutiny presidential adviser and real estate investor Jared Kushner has faced).

Become Your Own Landlord

It’s not just about reducing taxes; if you buy your office building and start paying down the mortgage, you’ll turn it into a cash machine for your retirement, when you can collect monthly payments even if you’ve sold your business. Or, if the buyer of your company wants the building as well, you can sell it for a profit. Just make sure you ask a tax adviser whether you’re better off trying to defer the gains by buying another rental, rather than paying the capital gains taxes and a separate tax for “recaptured” depreciation— and get proper advice in general. Tax rules are byzantine, and blurring the lines between your operating business and your real estate holdings—or failing to do the right paperwork on transferring your property—can jeopardize your tax breaks.

Still, if you’re up for wading through this red tape, you can start your retirement with a source of regular—and easy to earn—rental income. Doan, for example, merged his mortgage brokerage with another company 10 years ago. He still arranges mortgages for some clients, but his Hawaiian rental properties generate enough income for him to semi-retire—at just 58. “When I was in the mortgage business full time, I was working 10- and 12-hour days,” he says. “Now I work a few hours a day.”