Why Entrepreneurs Should Buy Homes

Working on an early-stage startup is a big investment. Every waking second that isn’t spent eating, sleeping, bathing, dressing, or attending to necessary social situations is invested in your startup. The same should hold true for your personal finances: every dollar that is not spent on your basic necessities should be invested into your business.

Sure, some of you are squeezing a few extra dollars from your monthly food expense by eating cheaper food or skipping on meals away from home. Some of you are shaving a few extra hours off of your nightly sleep and investing these as work hours. Some of you are even avoiding non-work-related social situations so that you can spend as much time on your startup as possible. So, why haven’t you figured out that repurposing the amount that you spend on shelter will benefit both your personal and business financial situations? Here is what I mean:

Renting Is A Zero-Percent-Return Investment – The equation is easy. Take your monthly rent expense and multiply that by twelve. This is the amount of someone else’s mortgage that you are paying in a given year. I know you have heard this before. At the end of this year, you get zero percent of this back. Obviously, this is expensive and not an investment.

Buying Allows a Positive-Return on Investment - When you purchase, you will be required to deliver a 5% downpayment, and approximately 0.5% cost to the lawyer for closing (since I am catering to those who don’t currently own a home, I am assuming that you are first-time buyer and you will receive the land transfer tax refund). In your first year, you can expect to see somewhere around 55% of your mortgage payment being kept as your equity. When you go to sell your home, this is the portion that you will have kept for yourself. In my local market, an entrepreneur can expect a very suitable house for $250,000, with downpayment equalling $12,500, the closing costs nearing $1,250, and the taxes near $3,000 annually. The total first-year investment will be around $16,500. Meanwhile, with a monthly mortgage payment of around $1250, 55% of the first year total, or $8250 will be kept as equity for the homeowner. By repurposing the rent dollars to a mortgage, this returns 50% of the initial $16,500 investment on the home after the first year, assuming that the owner lives alone.

Office Space in the Home Achieves Economies of Scope – How much non-work time are you really going to spend in the home’s common space? If your living space is an extension of the office, it is time to make your home’s common space the work space that you really need. Beyond the bedroom, bathroom, and kitchen, the rest of the space in the home is dead space in relation to your productivity. By owning a home and using the living room/dining room/basement as your team’s work space, you are able to lower your living and working costs by wrapping these costs under one blanket. You won’t need to lease office space elsewhere. Your commute time just became zero. You will gain from tax writeoffs related to the mortgage and operating costs of the space in your home. Overall your cost to work and live will decrease by combining the two of them.

Owning a Home Protects Your Personal Net Worth – You are pouring your time, money, and effort into your startup business. If it fails, your lack of having a steady income-producing job may mean that your personal net worth has deteriorated substantially. By investing in a home, you will have contributed something to your net worth that will serve as a float to cover months or years of living expenses should your startup fail. Going back to the example that I used, the owner would see a 50% return on investment after the first year. This sum would allow for an additional 6-month float should the owner have to sell the home and go back to renting. By owning for two years, the owner would have a 12-month float to cover rental living expenses. This is a better scenario than having paid $30,000 across those two years into someone else’s mortgage with zero return for the owner. (Let’s assume that market appreciation, or using a Realtor with home staging expertise, allows for negating any selling costs when the owner sells their home)

Time is More Valuable than Money – If you were to calculate your hourly worth, by dividing what your startup will be worth 2 years from now, by the number of hours you work across those two years, you would find that every hour spent has an extremely high value. Now, if you calculate the amount of time that you spend each month commuting, taking public transit, parking and walking to the office, or riding in cabs to the office, you would see that you are spending more theoretical money on activities that get you to your office, than you do on your monthly living expense. The point is: living near work saves you time, but living at work saves you the most time. When your competitors are pushing hard to get into your market first or sign that customer that you are dreaming of having, and they are able to work more hours per day than you, time becomes more valuable than money.

You seem to be making the right investments in your business (if you are reading this as an entrepreneur who is still in business). I hope this helped you to consider one more investment that will pay dividends to the success of your business and personal finances.