(This article was originally published in NextMove, our weekly newsletter on the housing market. Sign up for it using the box below.)
You may have dreams of starting a business. That costs money.
For example, say you want to operate some vending machines as a side hustle. While that can become lucrative, it comes with startup costs – thousands of dollars to buy vending machines, and snacks or drinks to fill them.
This is Jon Reed with NextAdvisor. I use the vending machine example because it’s a particularly fascinating side hustle idea we featured recently. Marcus Gram turned a couple of used machines into 25 vending operations across four states, making $340,000 in revenue last year.
Of course, unlike a typical app-based side hustle, such as delivering takeout on your bike, operating vending machines is far more capital intensive. You’ve got to get that startup money somewhere. Many of us in that position might think of our biggest asset – our home.
Here’s how it works. If you own a home and have some equity (that’s the value of the home minus what you owe on the mortgage and any other loans), you can use it as collateral to get a home equity loan or line of credit (HELOC). And then you can use that money for essentially anything, including starting a business.
But you may not want to. While a HELOC or home equity loan often comes with a better interest rate than a small business loan or line of credit, it’s because that debt is secured. If you don’t pay it back, you could lose your house.
Starting a business means taking a big risk. “Everybody who starts a business thinks that they won’t fail,” Tim McGrath, a certified financial planner at Riverpoint Wealth Management in Chicago, told us. Yet almost 20% of businesses fail in the first year, and nearly half fail within five years, according to an analysis by LendingTree. There’s no guarantee you’ll ever make back the money you owe. And, if you’re a homeowner, not being able to pay 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. Just don’t lose your house because of it.