Harness the power of your 401k or IRA assets to purchase a B&B or Inn

Can I really use my retirement assets to purchase an inn?

Few investors/entrepreneurs realize that they have the ability to finance the purchase of a business with retirement assets.   Most people, including many attorneys and accountants are under the impression that there are only two ways to access IRA/401k capital from their plan/s.  Borrowing involves repaying the principal with interest while borrowing may be subject to a pre-distribution tax and penalties and generally must be repaid within five years.  Note:  Early withdrawal may not be permitted by the employer who sponsored the plan, so check with your employer first. 

Background:  The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few restrictions on how retirement money can be invested. Except for life insurance or collectibles—such as artwork or coins—IRA funds can be placed in just about anything. Tens of thousands of investors have switched their retirement savings to self-directed accounts since the stock market correction of 2000 and 2001. By some estimates, 3% of the $3.5 trillion held in IRAs is now in alternative investments—and the number is growing.

Here is how it works…  A new corporation will be formed and will sponsor a new IRA.  Your retirement funds are rolled into this new account and the retirement plan will invest in/purchase stock in the corporation providing the capital to fund the down payment or outright purchase the inn.  The new retirement account can own up to 95% of its stock.  Your new retirement account actually purchases the stock of a company you control, much as if your individual IRA were to purchase shares in a publicly traded company.  
Why borrow from a retirement account?   When you purchase an inn with this type of structure you do not re-pay a loan which adds to overhead.  Why terminate or cash in and account when you can roll it over and not incur penalties and taxes due to a distribution?   Profits can flow into your retirement account and can be sheltered proportionate to how much stock it owns in the corporation.  Ultimately, once you sell the inn, any gain from the sale of the sale will be tax deferred in the same way as the profit. The accumulated tax deferred profits and gain from the sale at some point, have grown in a tax deferred structure and are now available for further investment and re-investment .

Very Important!  When the cash requirement of an acquisition exceeds the buyers available capital and consequently multiple investors are required to invest in a single project, one self directed 401(k) plan may be sponsored to accommodate multiple roll-overs; this feature may be very useful/attractive to family members or outside investors who wish to provide financial assistance or take advantage of an investment opportunity. 
Custodians don’t offer investment advice—that’s the self-directed part. No outsider can guarantee the soundness of your investment strategy and that can be as terrifying as it is liberating.  As always, consulting with a good financial advisor is important.  Unless you have both time and capital to spare, you should be cautious before putting your entire nest egg into a new business. However, investors with a strong do-it-yourself streak and a compelling alternative investment strategy may want to consider joining the growing ranks of people who have decided to invest their retirement funds in themselves. 

Note:  The material contained in this overview is provided for your general information and should not be acted upon without prior professional consultation with the appropriate experts.

 

All Rights Reserved © 2004 – 2013 Richard K. Newman

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This article was written and submitted by:

Rick Newman is the founder and managing partner of Commercial Capital Network, (CCN).  Rick maintains relationships with leading hospitality affiliate organizations and industry specialists, and is well known for consulting with Innkeepers, to provide funding for re-organization or to Aspiring Innkeepers acquire the "Inn of their Dreams".  Rick’s relationship with the bed & breakfast industry is promoted and maintained through his website www.innfinanciang.com  www.innfinancing.com/, [edit: fixed link: swirt]

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Proud Texan's picture
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05/30/2008

Just because you can doesn't mean you should.  B&Bs are struggling.  And, as many of have seem on "Hotel Impossible" you are not just investing in a business, but also your ability to run that business.  

 

If you gamble with your retirement portfolio and run the business into the ground, you will have no backup plan.

gillumhouse's picture
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05/22/2008

Anyone who gambled their 401k or IRA to fund a B & B purchase needs Gamblers Anon. It IS gambling. Shake the dice - will I know how to run the business. Shake the dice again - will guests come. Shake the dice again - will the economy stay up or will it tank. Shake the dice again - will a major appliance break or the roof sprout a leak?

Yes, life is a gamble but to gamble away one's total future without knowing what the job really is (newbies with rose-colored glasses) is totally idiotic. Use savings? yes. IRA or 401k - absolutely not. Savings can be replaced with work and diligence  - 401k or IRA not so easily.

Joey Camb's picture
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04/02/2010

I had a bit of this yesterday - the chap I rent my house to texted me - Do I know of any small hotels or B&B's looking to rent the property to people to run. Im like so what on early would make people like that rent to you? - no business plan, no relevant experience, no money ? you would have to do a lot more than just be thinking about it to carry it off with me!

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05/22/2008

If you don't have cash for a down payment for a mortgage, then you should NOT sacrifice your future doing a stupid thing like this. You may be an expert, but you don't know what you are talking about! No one should give up their retirement income for a B & B. Take this from someone who saved and paid cash for theirs!!

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08/30/2013

Using Retirement Assets to Purchase an Inn – The Real Story

Allow me to lay out some facts for the four (4) posters.

As I read your posts, I hear you saying that B&B’s are a high risk investment so don’t gamble away your retirement.  I can’t image if the 4 of you were selling your inn/s, and a buyer/s came along and said they would buy your inn/s using their retirement funds that you would turn them away?  Doubt it.... 

This form has aspiring innkeepers reading your posts.  They are the next generation of innkeepers and they should approach a new career and investment with their eyes open to be sure.  The problem as I see it, is when a buyer and a seller get together and craft a contract on their own and settle without financing (using all cash from retirement, savings or equity) and trusting one adviser/lawyer/realtor etc. to represent both parties without the benefit of impartial facts and figures.  How foolish these buyers would be?  How often does this happen? 

Facts:
a. Clients I work with generally have between $200,000 and $1,500,000 in their retirement program/s.  They have been successful in their prior professional lives and are generally fairly sophisticated in knowing to seek advice from professionals before risking all or a portion of their life’s savings on a business acquisition.

b. They consult with their attorney, account, and financial advisor/s and others, who assist them in preparing a due diligence list they (the professionals) will use to evaluate the investment and consult on a plan for acquisition if the planets align and all agree the investment has sound potential and that the property can handle the required level of debt relative to the cash the buyer/s have available for a down payment.

c. After a buying decision is made in consultation with experts, further due diligence occurs when the interested buyer makes application for a loan.  The lender may issue a Letter of Interest, but will require a full narrative commercial appraisal by a bank approved appraiser, title insurance etc. before issuing a final commitment. 

d. The lender uses a “bank approved” appraiser with whom they have confidence. The appraisal gives an opinion of value based on an analysis of the inns financials and comparable sales.  The appraiser makes adjustments for differences in the comparable sales used in the body of their work.  The inns historical financials play a significant role in the determination of value.
e. At this point the lender and the buyer should have reasonable confidence in the value and all that went into determining its value at that point in time, in that market.

f. The lender issues a final commitment to lend and memorializes the terms and conditions for the loan.
By this time, the buyer/s have enjoyed the benefit of a great deal of consultation and advice from qualified professionals.  The risks in making an investment in a business and its assets have been substantially narrowed and a serious review by the bank underwriters have determined the property can services the requested loan amount.

Background:  I introduced this program to the hospitality industry in 2005 because I observed that the sweet spot of buyers of inn properties were of an age that they were retired but not tired, looking for a new career, needing to find a new career because they were down-sized, you name it.  These folks need a job and may really need or want to work; they may have lost a bunch of equity in other investments, real estate, retirement accounts and so on, and they are tired of the lack of control they have over their financial future.

The story is all too familiar, the assets they knew they had access to, had lost value, so the capital they have available to buy your inns have fallen below the level required.  All the while the capital they have and could use never considered because they were miss-informed that the only way to use it meant paying taxes and penalties which again reduced what power they had to change their future.

I bear witness to how this program has changed lives.  Many, many of my clients can attest to its power and I am happy to have discovered its potential and I am especially pleased with how the plan has liberated capital so that aspiring innkeepers could realize their dreams of becoming innkeepers and business owners.

As I stated earlier, the next generation of innkeepers are reading your posts, the quality of information they receive it is up to you and others permitted to post.  Since this forum does not provide profile information on posters, the reader cannot determine the qualifications of the individual posting their opinions.  Aspiring innkeepers and others should have access to accurate information so that they can develop their strategies and so they know to seek help where needed and where they might find qualified assistance.

Momma Smurf's picture
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12/06/2010

If one needed to refinance, would it be possible to take funds from an IRA to increase the equity position in the B&B?

 

gillumhouse's picture
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Joined:
05/22/2008

Allow me to lay out some facts for the four (4) posters.
As I read your posts, I hear you saying that B&B’s are a high risk investment so don’t gamble away your retirement.  I can’t image if the 4 of you were selling your inn/s, and a buyer/s came along and said they would buy your inn/s using their retirement funds that you would turn them away?  Doubt it....

Yes, sir. I would turn them away IF I knew it was their retirement they were risking. My City needs a B & B. It does not need people who may like the business or not, may discover they do not like the area nor the people, for one reason or another remain open because they have no money to start over and as unhappy innkeepers run the business into the ground to the point my City has another empty relic to deal with. (We are doing nicely at eliminating that now.) I know how I am going to price my B & B when I am able to put it up for sale. And anyone who would need to dip into retirement to buy it will have no business considering it.

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Joined:
08/30/2013

Yes, it is complicated but feasible.  There would likely need to be a re-structure of the way the property is held as most inns are owned individually and rent to the entity that runs the business, or...  the asset is titled in the name of an LLC or S-Corp which will not work (Generally Speaking).... 

swirt's picture
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Joined:
05/17/2008

I just replaced the pdf with the typo with a corrected version at RickNewman's request.

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