The author Robert Kiyosaki has long been criticized for saying that a house is a liability, not an asset. That’s understandable.
A crisis brought by subprime mortgages in 2009 led to the Great Recession. A mortgage usually eats up a significant portion of any person’s budget.
However, Kiyosaki also mentioned that a house can still be an asset to a certain extent—and business owners can maximize it to help them fund projects, grow their enterprise, and get their dream going.
For people living in Utah, owning a home may even be more beneficial. The state remains a seller’s market, according to Zillow. Even if the homeowner doesn’t desire to sell the property soon, the market value is still likely to go up. They can use for leverage later.
Whether you already own a home or are thinking of approaching a mortgage broker, here’s how a house can help you run a business:
1. It Increases the Chances of Getting a Business Loan
Contrary to popular belief, fewer than 50% of small businesses apply for financing. However, lenders like banks are likely to reject over 75% of those who submit their applications.
In fact, in the second quarter of 2019, only 31% of small-scale enterprises could secure a bank loan, according to the Pepperdine Private Capital Access Index.
The reasons can vary widely. But an article in Entrepreneur revealed that two of the common culprits are the credit score and limited collateral.
About 40% of entrepreneurs aren’t aware of their credit score, which can be problematic as lenders almost always set a minimum score for pre-approval. New business owners, particularly millennials, may have a low credit score and a thin credit history.
Further, business loans are often secured because of the high value of debt. Thus, they may request a valuable asset for collateral.
In both situations, a house can provide solutions. First, they help the business owner build credit. Second, they can use it as collateral.
2. It Can Possibly Reduce One’s Tax Liability
Tax revenues account for 24% of the US gross domestic product, significantly lower than those of other OECD countries. In fact, the average tax rate in 2018 among member countries is over 30%. Moreover, the country uses a progressive tax system based on a person’s annual salary or earnings.
However, business owners have more financial responsibilities than an employee. Even if the tax rate is low, the actual liability may be a tough pill to swallow for many.
Fortunately, a house may help reduce one’s tax liability in the following ways:
- They can itemize a portion of their house-related expenses such as utilities, rent or mortgage, and supplies used in operating the business.
- A homeowner slash entrepreneur needs to pay a property tax, the rate of which can differ among states. In Utah, it’s 0.58%, one of the lowest in the country. But the individual can also claim a tax deduction of up to $10,000.
- They can also deduct their mortgage interest from their taxable income.
- One may reduce their taxable income with home-equity line of credit (HELOC) interest if they take up the loan to build, buy, or substantially improve the property.
3. Secure a Home Equity Loan or Line of Credit
Home equity loans and home equity line of credit (HELOC) function differently. The former works similarly to conventional business debt, but the biggest difference is one applies for a loan against the equity the house already has.
Meanwhile, HELOC functions like a revolving fund. One can borrow up to the highest equity of the property, use it, and then replenish the account once they already have the money. This way, the entrepreneur has access to assets to boost their cash flow anytime.
Those in Utah, though, will find these options extremely beneficial. Home equity refers to the interest the homeowner maintains on the property, and it is the difference between the lien and the market value.
Since the Beehive State properties are in demand even during the pandemic, the market value goes up. In turn, many Utahns may have already built excellent home equity even if they’ve been paying their mortgage for less than 5 to 10 years.
Kiyosaki is right in saying that a house can be a liability, especially when it doesn’t bring the homeowner any income in return. However, these three strategies suggest that by leveraging its market value and maximizing tax deductions, a house can be a funding source for entrepreneurs.