Running a daycare and wanting to buy a new house ! Is it possible

[Rachael]

I have been dreaming of buying a bigger home for over a year now...I have come across some issues...The bank had told me last spring that I should NOT claim anything for my daycare...so it looks like I made more on paper...They only look at the number after tax deductions, not what I actually made ?? Is this right ?..

This is correct - but you are misunderstanding with regards to "what you have made".

Every single business has business expenses or operating costs. For us, that includes food, milk, supplies, increased utilities bills. So the day care fees that are placed in your hands are NEVER what you have made. They are your total business income. From these, as you know, we would normally claim for our business expenses and then we are taxed on what is left. It's that what is left figure, which is what we have actually made i.e. our profit.
If a child pays (for example sake) $10,000 a year in day care fees, that is not what you earned because from that, you have expenses. Suppose the cost of you caring for that child, providing food and supplies was $3,000, that means you actually earned $7,000.

I think you are viewing your total business income before tax deductible expenses as your income and that has never and will never be the case. That is like a grocery store considering their takings at the register as their business income without considering operating costs like staff, rent, building costs and supplier/inventory costs. Their total incoming funds is NEVER what that company makes in profit.

The advice the bank has given you therefore makes sense. By not claiming your business expenses, on paper, it appear that your total business income is entirely profit. Using the above figures again, on paper, you would have taken $10,000 and not claimed any expenses therefore it would be on paper, entirely profit meaning you earned and kept the full $10,000.

As you can see, this inflates your business income artificially.

$10,000 less $3,000 in expenses, means earning $7,000. Times that by say 5 children and you actually earned/profited $35,000 out of the $50,000 fees you received.

The bank wants you to not claim expenses (or keep them to a minimum) so on paper, you took $10,000 x 5 = $50,000 and all of it was profit so it appears like you actually earned/profited the full $50,000.

There is a formula banks use when calculating how much mortgage they are willing to give you. If they are able to say that your gross income is $50k rather than $35k, they can then justify lending you more.

I had to do exactly this myself when I bought my house 4 years ago.

However, we are mortgage free so selling our house and putting that money towards the new bigger one would be our saving grace.

That is similar to what my situation was.

I wasn't mortgage free and when my husband died, there was no insurance money to pay off the house. I had to get a mortgage in my own name for the amount outstanding on the loan. Thankfully, where we had lived in the house a couple of years and had put some money down, the house was worth a few grand more than the debt against it. Having this positive equity meant I was borrowing less than the house was worth, and therefore, the bank considered issue me a mortgage despite being self-employed as a fair risk on their part because if I had defaulted on the payment, they would have re-possessed and the asset was worth more than the mortgage. This all boiled down to, they would get their money back for sure.

[cfred]

I just bought my house 2 years ago, without another source of income in the family. I'm it and the daycare is what funds us completely. Honestly, I didn't think I'd get a mortgage at all, for the same reasons you're concerned about. But I did and we're fine and it was well worth exploring...just to see what I could get. I did have $100K to put down (divorce settlement) but still carry $200K. I was astounded when my broker called saying we had financing....like really, completely shocked! Sooo happy I bothered to take a chance because my expenses are now substantially less than they were when I was renting.

Go ask a good broker. It never hurts to ask

[Julie]

Wow thank you. You mad this so much clearer for me I get in now. Very much appreciate the advice and help.