Don’t Bet Your House On Your Hustle Side

We want to help you make more informed decisions. Certain links on this page – clearly marked – may direct you to a partner website and allow us to earn a referral commission. For more information, see How we make money.

(This article originally appeared in NextMove, our weekly housing market newsletter. Register using the box below.)

You may be dreaming of starting a business. It costs money.

For example, suppose you want to operate vending machines as a side business. While this can become lucrative, it comes with start-up costs – thousands of dollars to buy vending machines and snacks or drinks to refill them.

Meet Jon Reed from NextAdvisor. I use the vending machine example because it’s a particularly fascinating side hustle idea we featured recently. Marcus Gram turned a few used machines into 25 sales operations in four states, generating $340,000 in revenue last year.

Of course, unlike a typical app-based side business like delivering takeout on your bike, operating vending machines requires a lot more capital. You have to find that start-up money somewhere. Many of us in this position might think of our greatest asset – our home.

Here’s how it works. If you own a home and have some equity (meaning the value of the home minus what you owe on the mortgage and any other loans), you can use that as collateral to get a home equity loan or line of credit (HELOC). And then you can use that money for pretty much anything, including starting a business.

But you may not want that. Although a HELOC or home equity loan often comes with a better interest rate than a small business loan or line of credit, that’s because that debt is secured. If you don’t repay, you could lose your home.

Starting a business is taking a big risk. “Anyone who starts a business thinks they won’t fail,” Tim McGrath, certified financial planner at Riverpoint Wealth Management in Chicago, told us. Yet nearly 20% of businesses fail in the first year and nearly half fail within five years, according to an analysis by LendingTree. There is no guarantee that you will ever get the money you owe. And, if you’re a homeowner, not being able to afford a HELOC or home equity loan means a far worse outcome than a bad credit score.

No matter how airtight your business plan is, there’s a chance it won’t succeed. Don’t lose your home because of this.

Comments are closed.