Business owners always concentrate on their business when they think about building wealth. For a business owner who is still running their business, this is appropriate behavior.
At the same time, financial planning should be part of the strategic planning process for business owners. If a business owner decides to do some financial planning as part of their strategic retirement plan, they might find that the real estate they operate their business from is very important. In many instances the cash flow from real estate might be more important in retirement than the cash flow from the business.
Business owners tend to think of the world in cash flow. I believe that this is a good way to see a financial world. When a business is sold and the proceeds are turned into cash, that asset will produce much less cash flow than it did as an active business.
If a business is worth $1,000,000 the owner could end up with about $800,000 after taxes. Many financial planners will say that you can safely spend 4% of your principal a year and have room for inflation adjusted cash flow over the years. This means that the business (which was making $200,000/year) will end up providing the business owner $32,000 in the first year he or she retires.
If that same business owner owned a piece of real estate that was worth $500,000 with the mortgage paid off, that asset might produce $40,000 per year. (Assuming an 8% cap rate.) Even though the business produced much more cash flow while the business was operating, real estate that is kept as an active rental asset might be worth more from a cash flow point of view in retirement.
I believe looking at cash flow from real estate in retirement is an important factor when a business owner starts thinking about leaving their business. And, in many instances becomes a crucial part of the retirement income puzzle.
Have you thought about what about owning the real estate that you operate your business from could mean for your retirement? Make sure that as you plan for an eventual exit from your business that you make financial planning part of your long-term strategic plan.
I have put together a case study that uses what I call the four boxes of financial independence. This case study will give you a method that is easy to use to see if you are on the right track to reach financial independence after you sell your business. To get this case study, click on the button below.