If you’ve been considering buying a house and starting a business, you’re likely wondering which milestone you need to reach first. Should you use the cash you’ve been saving as a down payment and stick with the job you have? Should you keep your down payment on a house and start a business instead?
On one hand, owning a home is an important step we take in adult life and one that gives us stability. On the other hand, if you feel compelled to start a business, there’s a good reason for it. While there are risks involved in taking the leap of starting a business, those of us who feel driven to do so are often smart risk-takers who can turn a small investment into a successful business.
We believe the best decision for would-be entrepreneurs is to keep your down payment on a house and start a business instead. Here’s why.
Keep your down payment on a house and start a business
When we say we believe you should keep your down payment on a house and start a business instead, we’re not saying you should rent forever. The idea is to accumulate a little wealth before you make the decision to purchase a home. There are several reasons for this recommendation.
If you wait, you can buy a bigger home.
You may have accumulated between $10-20K for the down payment on your home so far, and while that’s a great start, it won’t put you in the home of your dreams or do very much to lower the amount of principle you’ll be paying on for 30+ years. If you save your down payment on a house and start a business with it instead, you’re making an investment that has the potential to make you wealthy.
If you make smart decisions in starting your business, you could purchase a home in cash within a few years. Look at the average salaries for entrepreneurs in their first year of business in our recent blog post. That’s infinitely better than paying a small down payment and being chained to a mortgage for decades.
You might decide to change locations.
What if the place you’re in now doesn’t turn out to be the place you want to be in 5 years? If you decide to change locations, you’ve essentially squandered the down payment on your home. You don’t want to purchase a new house and then find that you’d rather be one state over (or one street over, for that matter).
The reality is that once you buy your home, you are stuck in it until you manage to sell it. That’s a long and tedious process, so you’re likely better off using your down payment to start a business. That way, when you’re ready to buy a home, you’ll be more likely to be sure about where you want to put down roots.
You don’t want to become house-poor.
Have you heard the term house-poor? It refers to owning a nice home but struggling to pay your other bills or handle your financial obligations. If you’re a first time home buyer, you could get locked into a mortgage with outrageous interest rates that make your payments harder and harder to keep up with.
If you get into a home you can’t afford and struggle to handle your bills and obligations, you’re much less likely to ever step out on a limb to start a business.
Buying costs more than renting.
Your monthly mortgage amount might technically be lower than what you pay each month in rent, but the costs over the long term are much higher for buying a home vs. renting one. If you buy instead of rent, you take on a slew of new costs and fees not applicable to renters: Home and property maintenance, HOA fees, interior and exterior decor, routine repairs, major repairs, landscaping, energy efficiency upgrades, etc.
Let’s say that renting is $1100/month while a mortgage on a similar home is $900/month. You’ll still save money by renting because you won’t have the additional $5,000+ in maintenance, fees, and repairs each year from owning a home.
Before you’re saddled with the crushing weight of a 30+ year mortgage, start your business. Keep your down payment on a house and use it get your business off the ground instead. You’ll be in a better financial position to buy within a few years – and you’ll be so glad you waited.