What Comes First: The Chicken or The Egg?
Or put another way: Should you pay off your business loan/mortgage BEFORE you start investing in your business?
At the time of writing this blog, interest rates are so low, that many people question if it is worth it to focus on paying off business loans and mortgages instead of investing. When your mortgage rate or interest on your business loan/line of credit is lower than what you could get by investing the same amount of money, you may be better off investing in your business. After all, if profits grow you’ll have money enough to pay back your loan and pay yourself more. Good debt = good investment.
You could also buy a property for your business, which is a strategy many business owners use to monetize their business in another way. After running the business for many years out of a property you own, you can also cash in on that property and its appreciation.
Business owners who have a mortgage on property bought for the business are normally able to deduct the interest as an expense of running the business whereas homeowners cannot. Investing in your business by owning a property for business can be an effective strategy, and in addition, if there is extra cash in the business, this can also be invested, although often for short periods of time only. Finally, when a business owner is able to take dividends out of the business, then these may be wisely invested which will in turn allow your personal wealth to grow. Be sure to ask your accountant to discuss these options with you.
For the average investor, it could also make sense to put extra funds into investing rather than paying down your mortgage. Please remember to think about the following:
• What is the interest rate on the mortgage?
• How much do you expect the home to increase in value?
• What can you expect to earn on the investments? Will they be registered so that the compounding or growth is not taxable?
• How long would you want to pursue this strategy before using the funds invested and for what purpose?
• Do you have a Plan B if mortgage interest rates start to increase?
Like all investment decisions, you’ll have to do your homework before you can decide whether the chicken or the egg is first.
Just good advice.
Want to know what to reasonably expect in terms of R.O.I. Stay tuned for my next blog post.
Using borrowed money to finance the purchase of securities involves greater risk than using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Note: Leveraging carries its own risks and is not for everyone. Talk to your financial advisor for advice on properly managing those risks.