Should Entrepreneurs Be Homeowners?
Get the working capital your business needs from Entrepreneur Lending, powered by CAN Capital. Learn More »Shortly after I launched my web design firm in 1995, I did something my accountant told me was pretty crazy. I sold my house in Hollywood, Fla., moved to New York City, cashed in my mutual funds and put every dollar I had into a brownstone in Brooklyn Heights that I couldn't afford on what I was making as a freelance writer.
Looking back, my contrarian bet was a pretty smart move. Not only did my Brooklyn brownstone double in value over the next eight years (I sold it in 2003), but it served as collateral for the credit line that I used to take my company public in 1999. My brownstone also served as a home office for my growing company as well as a great place to raise my two daughters. And thanks to the tax deduction that the government gives for mortgage interest, I was able to own my own home for less than it would have cost to rent a house and an office.
Of course, that was then and this is now.
With housing prices still falling in many parts of the country and home sales plunging now that the government's tax credits have expired, home ownership may not be such a great deal for entrepreneurs and small-business owners any more. If I had tried a similar strategy today with the income and assets I had back then, I might have found that A. I couldn't sell my house in Florida for anything close to what I paid for it B. I couldn't get a mortgage on my Brooklyn brownstone because I'd be considered too risky a borrower and C. I couldn't get a credit line for my company because I would have had no stocks, bonds or other liquid assets to pledge as collateral.
Traditionally, business ownership and home ownership have gone hand in hand. Because shares in a privately held business are generally illiquid and the business may not kick off a whole lot of cash after paying salaries and expenses, home equity has long served as the kind of rock-solid asset entrepreneurs have used to obtain loans and credit lines to grow their companies. With millions of homes now "under water," many business owners have little or no home equity to put up as collateral.
So, if you're running a business and don't currently own a home, does it make sense to buy one rather than continue renting? After all, there are still some pretty incredible deals on the market, and mortgage interest rates have hit new lows.
I think you should consider it, provided you can answer "yes" to the following questions:
you still have enough capital and cash flow to run your business once
you've handed over the down payment and started paying your mortgage?
you or your spouse has to relocate within the next five years, will you
be able to rent out your house for enough to cover your mortgage
- Can you use the house as a home office and/or storage facility in addition to a place for you and your family to live?
the house have a spare bedroom, carriage house or "mother-in-law's
apartment" that you can rent out for extra income in case you need it?
the house and lawn small enough that you and your family can take care
of it without the help of a landscaper, handyman, etc. that you'll have