When Martin found out what it was going to take to qualify for a home loan, he almost walked away from his dream. If he changed the way he filed his taxes, he would owe more of his hard-earned money, a lot more. It felt worse than wasting money, because when you do that, at least it’s typically on something you want.
He approached the problem like he did most business decisions, with research. Ultimately, he found it made good financial sense to change the way he was filing his taxes so he would be able to qualify for a home loan.
Renting is Better than Buying
Even if you work around the clock, you have to live somewhere. You’ll either pay someone rent or buy a home of your own. Sometimes entrepreneurs look at rising home prices and wonder if there’s enough of a difference between a house payment and the cost of renting to make it worth the extra trouble.
CNBC looked at national trends and found it’s better than to rent than to buy in today’s housing market. In our area cost of living is low, but buying is almost always cheaper than renting.
In Laredo, the average home value is currently $141,400 according to Zillow. With a 30-year note at today’s 3.29 percent interest rate, your mortgage payment would be under $700 a month. You’d also have to factor in insurance, property taxes and in some cases private mortgage insurance (PMI), but with all that, your payment would still be less than $1,000 monthly. Contrast that with the current average rental cost of $1,466.
Rio Grande Valley homes have similar numbers. Plus, the cost of renting is already up three percent over last year and is projected to keep climbing.
In contrast, when you buy a home, you basically lock in the price. No matter how much home values climb, your payment stays about the same.
Your Home Becomes an Asset
When you buy a home, you start building equity. As you pay down your loan, you start to owe less than your home is worth. At the same time, home values go up. Over time, real estate will almost always appreciate.
There aren’t many investments that are pretty much a sure thing. Buying a home is one of the best long-term wealth-building strategies. It makes even more sense for business owners. Your home becomes a valuable asset that if necessary you can borrow against. One day if you need funds to invest back into your business, you can cash in on some of the wealth you’ve built in your home.
Buying a Home Gives Entrepreneurs Tax Benefits
There’s more good news when you own your home. The interest you pay on your mortgage is, in most cases, tax-deductible. For most buyers, in the first years after they make their home purchase, that interest is a significant portion of your payment. If you itemize rather than taking the standard deduction, you can reduce your taxable income by the amount you pay.
Under the Tax Cuts and Jobs Act of 2017, you can also deduct up to $10,000 in property taxes. The same legislation also says if you take out a home equity loan, you can deduct that interest too as long as you follow a few basic rules.
Sometimes when buyers get a mortgage, they pay “points” to the lender that basically buy them a lower interest rate. Points, too, are tax-deductible.
Most lenders require private mortgage insurance if you don’t put 20 percent down when you buy your home. In many situations, you can deduct PMI.
There are also big tax benefits if you decide to sell. With most investments, if you make a profit it counts as income, so you have to pay taxes. If you live in your home for two years, then sell it at a profit, that isn’t the case. According to the home sale exclusion, you’re excluded from having to pay taxes on profits up to $500,000 when filing jointly and $250,000 if you’re single.
Home Office Benefits
Most entrepreneurs don’t stop working when they leave their business location. If you work from home, you can claim part of your space as an expense. There are rules and restrictions, so it’s a good idea to talk to your accountant. However, most entrepreneurs can deduct $5 per square foot for up to 300 square feet, for a deduction of up to $1500.
You can take that deduction whether you rent or own your home, but buying gives your office permanence. You can modify your space to fit your business needs and have a comfortable place to be your most productive without having to consult with a landlord.