As an auto shop owner, you likely spend your days focusing on your customers and running a smooth operation. But what about your property? If you own the building your shop operates in and rent it back to yourself, you may be overlooking a critical strategy to protect your assets, ensure compliance, and even increase your business’s value.
In this post, we’ll break down why paying yourself rent matters, how to calculate fair market rent, and the steps to set up your self-rental the right way.
This blog is based on Episode 149 of Business by the Numbers Podcast, click here to listen!
Why Paying Yourself Rent Is Essential
1. Legal Protection
By separating your shop and your property into two entities, such as an LLC for the real estate, you create a legal firewall. This means that if someone sues over a parking lot incident, your personal and business assets remain safe.
2. Tax Clarity and Compliance
While paying yourself rent won’t save you taxes—it simply shifts income between your shop and your LLC—proper structuring can optimize deductions for repairs, taxes, and insurance.
3. Business Valuation
When it’s time to sell your shop, buyers expect the business to sustain realistic rent payments. Paying fair market rent now ensures your shop looks profitable and doesn’t scare off potential buyers.
How to Determine Fair Market Rent
Calculating fair rent doesn’t have to be complicated.
- Use Your Mortgage: If you recently purchased your property, your mortgage payment plus a small markup is a great starting point.
- Estimate Based on Property Value: Charge about 10% of the property’s value annually. For example, a $1 million building should generate $100,000/year in rent.
- Consult a Real Estate Agent: For precise numbers, work with a professional to perform a market analysis.
Steps to Set Up Your Self-Rental
1. Create a Rental LLC
Transfer ownership of your property into a legally separate entity. This protects your shop and personal assets in the event of a lawsuit.
2. Open a Business Bank Account
Keep your rental income and expenses separate for clean financial records and improved legal standing.
3. Draft a Lease
A triple-net lease is ideal, assigning responsibility for taxes, insurance, and maintenance to your shop while providing transparency and legal compliance.
The Long-Term Benefits
By structuring your self-rental properly, you’re not only protecting yourself today but also securing your shop’s future. A well-maintained self-rental strategy:
- Reduces risk in the event of a lawsuit.
- Ensures tax compliance and clarity.
- Preserves your business’s value when it’s time to sell.
Take Action Today
Don’t let an overlooked detail jeopardize the future of your business. Taking the time to structure your self-rental properly is an investment in your shop’s success.
If you have questions about this process, reach out to us for guidance at info@paarmelis.com. Let’s make sure your business is protected and positioned for growth!