“Dear Steve,
I am a self-employed home owner with $85,000 in business debt and $130,000 in home debt. We have about $30,000 in equity on our home.
We make +/- 100,000 per year. Half of that goes toward the business and the other half we live on. Should we sell our house and rent? We have really outgrown our current home and could rent a larger home for the same amount that our payment is. This would allow us to throw the $30,000 in equity at our business debt. We want to make the right decision financially. What do you think?
Pam”
Dear Pam,
Renting versus owning is a decision that many more people should contemplate. Renting certainly makes sense if you need to reduce your expenses or you are in a transitional period where you may not remain in that house for more than five years.
If you rent it also lowers your overall cost of home maintenance. For example, if the heat pump goes or the hot water heater needs replacing, that is the landlord’s responsibility, not yours.
The issue here really comes down to which is better, staying in your home or freeing up the equity to use to reduce your business debt. Any elimination of debt only helps a business to make it through difficult economic times, and that’s a good thing.
Plus, you’ve said that you’ve outgrown the current house so even if you elected not to sell the current house does not really meet your needs.
I think from what you shared with me I would do the following:
- Make sure you understand the tax consequences of using your home equity to invest in the business.
- Reduce your business debt and that may free up more money that maybe the business can invest on your behalf in a retirement plan, health insurance or some other benefit that you could get but write off.
- Seriously consider selling the home, use 66% of available equity to reduce the business debt and put the other 34% in a savings account so you’ve got some emergency cash and won’t have to run the debt back up again if you get an unexpected business expense.
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Pam, most people who think they have equity in their home find out otherwise, once a physical appraisal is conducted. I would double check that by ordering an appraisal which will also serve you well if you’re right and decide to sell the home. One’s home is typically their largest asset and it just amazes me that more homeowners don’t order appraisals at least on an annual basis. The cost of an appraisal is typically $275 to $300. There is no better tool to use against a buyer (especially in this market) than a real appraisal conducted by a certified appraiser.
Mike Reilly, CDS
Emerge America, LLC
Pam, most people who think they have equity in their home find out otherwise, once a physical appraisal is conducted. I would double check that by ordering an appraisal which will also serve you well if you’re right and decide to sell the home. One’s home is typically their largest asset and it just amazes me that more homeowners don’t order appraisals at least on an annual basis. The cost of an appraisal is typically $275 to $300. There is no better tool to use against a buyer (especially in this market) than a real appraisal conducted by a certified appraiser.
Mike Reilly, CDS
Emerge America, LLC