Should an entrepreneur buy a house?

The choice depends on the requirements, risk appetite and income visibility

A home is probably the single most expensive asset anyone would own. The purchase therefore calls for much thought — the need for it, the financial aspects and its suitability. More so for those in business, since they tend to face a lot of cashflow uncertainty.

Why buy

More than other financial holdings, traditional assets such as a home have their own set of merits for those in business. For example, if you are in a job and contemplating starting a business in a few years, owning a home that is already paid for can be a big plus. Home ownership reduces your monthly expense budget, as there is no rent to pay. This can greatly reduce cash stress, as money is often a trickle in the early days of most ventures.

Buying a house a few years before starting your company enables you to get a home loan at better terms. For instance, SBI’s home loan for non-salaried people requires that their businesses be in existence for at least three years and earn a profit in the last two years. This can be a tough bar for some.

You can also use your property as a collateral for any loans you wish to take, be it for personal reasons or for business. Banks look favourably on such assets when approving loans. You can also make use of the loan against property option to get a better interest rate vis-à-vis personal loans. For instance, HDFC offers loans against property starting from 9.6 per cent interest rate and over-drafts against property starting from 10.1.

Why avoid

There are many reasons why a person should not buy a home after he/she begins his/her business, especially if the resources are limited. For one, your business is likely to give you better returns than a real estate investment. For another, investing your savings in the venture — rather than in a house — can reduce your finance costs. Plus, there is likely to be less stress as there are no repayments or other return expectations to meet when you don’t have a home loan.

Given that rental yields are rather low (2-4 per cent), renting a home is currently cheaper than buying one. This is true in most Indian cities and not likely to change in a hurry. So, it makes sense to not lock up capital.

Also, a home is mostly illiquid.A larger pool of cash or other investments can avoid the scramble to manage cashflow issues when there are unexpected expenses or new opportunities in business.

If your money is kept in, say, fixed deposits or equity, you can still ‘borrow’ against it rather than withdraw. Yyou can take a loan for 75-90 per cent of the FD value at an interest rate 1-3 per cent higher than the FD rate. This is much lower than the rate on a personal or business loan. These loans are also dispersed faster as the documentation and verification processes are simpler.

Your plan

As in any financial planning, the choice to buy or not depends on your personal requirements, risk appetite and income visibility. A detailed analysis of your major expenses — education, marriage, retirement, etc — and ensuring there is enough insurance coverage, emergency funds and understanding of shortfalls, is required. As leaving a job to start a business is a major change, you need to come up with a detailed plan for all assets — including a home — for this changed circumstance.

You can also consider buying commercial property, rather than a residential one, if that makes better sense for your business and as an investment.

For most people, though, home ownership can be a great source of comfort when battling the ebbs and flows of the business. If it’s a home that your want, plan to buy it a few years ahead of launching your venture.

Businesses often have uncertain revenues and cash flow as orders may be lumped and payments are invariably delayed. A home loan EMI will only add to the stress. It can certainly be better managed while in a job with a regular salary.

The author is an independent financial consultant

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