Owning a house should not be taken lightly, especially in a time like 2021. It requires long-term commitment and maintenance and making smart financial choices to ensure that one does not end up being house poor.
It’s especially hard for small business owners who may not be making the biggest profit margin. However, one is not automatically disqualified from homeownership because their business is just starting or on the smaller side.
Here are some signs a small business owner might be financially ready to purchase their own home.
The business has some level of financial stability
Here are some telltale signs that a company is doing well financially:
- The revenue is growing. This means that there is progress in the number of customers and frequency of financial transactions.
- The business expenses remain flat relative to the revenue. For example, if the business experiences an increase in revenue by 8 percent every year, the expenses don’t exceed that growth.
- The business is not cash-poor. This means that there is a financial capability to cover the costs of adding inventory or hiring additional staffing—if those expenses are necessary. A cash-poor business is not doing well, finances-wise.
- The company’s debt ratio is decent. The debt ratio is simply the amount of money your business owes versus how much your company is worth. This is often expressed through a percentage or a decimal.
- The profitability ratio is also excellent. This means that your business’s performance measures up to its capacity to make an income or profit.
- The number of customers is always growing, and you have repeat customers as well.
- The profit margins, also known as return on sales, are also high. This means that your business is generating profit from sales—and this is important because mortgage loan companies will look into it as a way to help you gain an insight into what you can afford as well.
- Your personal income statement has a high valuation, and it will be seen primarily through your net income, which is the most straightforward indication of how you’re doing financially.
The business owner can afford to pay the monthly required amount
If you are confident in the growth of your business and you think that you can afford the monthly payment, then it may be a sign that you’re ready. You can ensure this by checking if you can afford to allocate at least 30 percent of your entire income for the house and lot. A small business owner is also ready to be a homeowner if they have saved enough money and can afford to put in a bigger down payment so that they’re able to lessen what they need to pay for down the line.
The business owner’s debt is in control, if not eradicated completely
If the business owner is debt-free—which means no outstanding credit loans or student loans—this is an excellent sign. This is because whatever money was supposed to be used to pay off the debts can now go into the emergency fund, savings, and other home expenses. It’s also a clear indicator that the business owner might increase their chances of being approved on their home loan application. The rule of thumb is that the lower an individual’s debt load, the better the kind of loan terms they will be offered. If the business owner is already working out their debts or manageable and in control, now may be a good time to buy.
The business will benefit from a bigger space
If a bigger home can be a secondary headquarters for the company, it can also be considered an investment, albeit on the owner’s own money. Here are some signs that a business needs a second location:
- One workspace is not enough to handle all the day-to-day operations that take place.
- The staff is growing, and there is more need for physical space for everybody.
- There is a market in the specific location where the owner wants to purchase a home.
- The company found a way to streamline current operations, and it’s something they can replicate in a second location.
- There is a financial foundation to open a second workspace.
If you think the new home can be a secondary office of sorts and help grow the business, it might be a sign that it’s time to buy. While we need to be careful during economic uncertainty, we also don’t need to live in fear, especially if we have the right financial strategies to back up our choices.