Starting a business and buying a home are two major milestones in life. The trouble with these milestones is that it’s not always clear which should be taken care of first. On one hand, it seems financially prudent to start a business before locking yourself into a mortgage. But on the other hand, buying a house is a “right of passage” and it may seem strange to start a business before buying a house.
Don’t let that dictate your decision. Experts say you should start a business before buying a house, and for good reason. There are better ways to invest your money than in a home. Waiting to buy will put you in a better, more secure financial position when the time comes. And if your business venture leads you somewhere else in the world, being unencumbered by a mortgage will be seriously freeing.
Why You Should Start a Business Before Buying a House
A home is a terrible way to invest
Maybe you’re telling yourself that locking yourself into a mortgage you can’t really afford now isn’t a bad idea because it’s a responsible investment that will pay off in the future. It’s not.
Home ownership does not yield high investment returns. In fact, depending on where you are and the current state of the housing market, home ownership may offer very low or even nonexistent returns. Yikes. Once you make a down payment and start paying on your mortgage, you’ll never see that money again. In the event of a housing crash, you could lose a lot of money.
It’s better to invest in an avenue that has a better chance of yielding high returns – your business. Start a business before buying a house if you’re truly interested in making a good investment.
Wait for financial security before buying
If you’re considering buying a house, you’ve probably been saving up for a down payment. If you have enough money to make a down payment on a home, you have enough money to start a business.
In fact, James Altucher of Formula Capital says just a fraction of your down payment is enough to start your business.
“Take 1/20th of the down payment amount. Start a business. Your investment might go to zero (which it might also do with a house) but it might also go up 10,000%. Eventually, as an entrepreneur, if you are persistent enough, you will get one of those 10,000% returns.” – James Altucher, Managing Director at Formula Capital
So even if you haven’t saved enough money to put a down payment on the home you’d like, you may still have enough saved to start your business. Wait for returns from your business to start flowing in before you invest in buying a home.
The financial security you’ll have 5 years down the road will make you a much better candidate for buying a home – and if your business does well, you just might be able to buy the house in cash.
Freedom to change location
Finally, you should start a business before buying a home because you’ll have greater freedom to change location. Starting a business is a process of trial and error. You just may find that your chosen locale isn’t the best place for your business. Maybe your audience is somewhere else, or your family decides that they want to be near the coast. For whatever reason, many of us don’t stay in the same place we bought our first home.
And what happens to the down payment and mortgage payments we’ve already made when that happens? Poof – gone. Sure, you may sell your house (after what feels like an eternity), but where will the money from the sale go? Straight into your new home in the new location.
It’s a vicious cycle. You can opt out by getting your business off the ground before you move to buy a home. It just may be the smartest financial decision you’ll ever make.