IN NAUTICAL CIRCLES, there is a well-known saying – the happiest day of your life is the day you buy your first boat and the second happiest is the day you sell it.
I believe that for a true entrepreneur the same analogy can be applied to buying a home.
In Ireland, from an early age, we have been conditioned to believe that it is important to buy a house and paying rent is ‘dead’ money. This is a national misconception that we need to reverse. It is no accident that, in Europe, Germany and Switzerland have the lowest home-ownership rates.
Since I bought my first home over 30 years ago I have bought and sold many properties. Four of them have been my homes. Two of those homes were repossessed by the banks when my businesses failed.
I overinvested in my first home in Atlanta, spending too much money on renovating it, and when I finally sold it I dropped over $200,000. I have just sold my home of 17 years and essentially made the same mistake – and will just about break even. It has essentially been a forced saving program.
If you are a true entrepreneur and are seriously thinking of setting up your own business, I believe that you should shelve any notion of buying a house. It is a sad, statistical fact that 80% of new businesses go broke within the first two years, and one of the main reasons is lack of liquidity. Buying a home greatly reduces your liquidity.
As we have all seen, houses prices are massively unpredictable. But that is not the reason you should not buy one. Let me give you five reasons why purchasing a home makes no sense for a budding entrepreneur:
1. If you cannot make more money by investing your spare capital in your own company than speculating in the housing market, you probably shouldn’t invest in your own company in the first place.
2. If you buy a house and you go to the bank to borrow money, they will want a personal guarantee, which will essentially mean that they will repossess your house if your business goes broke. This places a lot of additional strain on you and your relationship with your partner.
3. Owning a home takes your focus away from building and growing your business. If you rent and something goes wrong, you call ‘the man’. If you own the home you are ‘the man’ and you can waste a lot of valuable time sorting out domestic issues.
4. Home ownership is certainly no guarantee of wealth creation. Indeed, as we have all seen by the recent downturn, it can be the exact reverse and you can end up with negative equity. Ironically, the properties I bought as pure investments have fared well, while the properties I bought as family homes were definitely not money makers. The investment properties were bought as pure, non-emotional, net yield investments. But it was pure luck that I happened to buy at the bottom of the market.
5. Renting gives you the flexibility to move quickly to a different market if you have to do so to facilitate your business needs.
If, however, I have failed to convince you not to buy a house and invest in yourself and your company instead, never forget the golden rule. Buy the worst house in the best street and in the worst street in the best area. At least that way you will have the best chance of capital appreciation. Before your friendly bank manager repossesses it…