so i’ve assembled a team of people to cover all aspects of renovating and selling a house (i think)
i’ve found a supplier for wood/ building materials, a private contractor who has good workmanship,a home inspector (in school currently), an accountant (still in school) and a friend and i are taking a local real estate licensing course.
we’ve developed a solid plan as to how were going to progress our business; however, we still dont know how were going to generate the money
if 3-6 people created a business and we took out a loan how much would be approved for? (i just need a rough ball park number so i can gauge how much for the estate and how much for the repairs)?
would we be approved for a bigger business loan considering the liability of the loan is divided by 3-6 people?
how much money would we need as a down payment? most of us are in school and finishing up so we have to pay off our school debt before putting a down. however, we do want to strike while the iron is hot and we want to take out this loan before another economic downturn occurs so that we can avoid the bank being stingy
any help is appreciated, thanks!
There are many different issues to address here. For your business, you need to determine who is going to have an equity share in the business and who is going to be an employee or independent contractor. You don’t need to give your building material supplier equity in the company. You’ll buy products from them, but that’s pretty much where that relationship would end. Is the contractor going to have equity in the company or just be paid for his work as an independent contractor? Who is going to bring what to the table for money, skill sets, time, etc?
While thinking about these things, you also need to have plans for what happens if one of you wants out of the business, dies, divorces, etc? How will you wind the business up when it’s time to close up shop?
For your financing question, there’s not nearly enough information here for someone to say that you’ll be approved for a loan in the amount of XXX dollars. Do all of you have good credit? Do you have credit at all (looks like some of you are still in school)? If someone has bad credit, that will factor in if they are legally part of the business because the bank will look at those things. If your contractor has poor credit, but he acts as an independent contractor, that won’t matter for the loan because the other of you who have equity in the business will have to have good credit for financing.
What assets do you have vs. liabilities? All of that along with your current income will be reviewed too.
When I went looking for financing, I prepared a full personal financial statement and had current pay statements as well as the past three years of tax returns there for the banker to see. After we had rental properties and still needed more financing, I also included all of the financials for the past few years for the properties along with pictures and stats on each house.
Always better to have the information there and not leave the bank with them wanting more information from you.
You can call around to the banks in your area and find out who is lending on investment (NOO) property. Some banks probably won’t be lending for these projects. Find the ones who are in the game. Then find out what percentage they want down. I would at least have some idea of your target property before talking to them. Do you want to rehab/resell 50k houses or 300k houses or somewhere in between? Expect to put up more in the beginning and have to prove yourselves before the bank will extend a larger amount of financing. Many people screw up REI and the bank isn’t going to jump in the deep end of the pool with a newbie.
My experience with investment property financing in my area has been everything from basically 0% down up to 30% down (I’m still an active buyer). I pay a higher percentage of interest for these loans and they are for shorter terms than regular mortgages. Ours are normally 10 yr amortizations.
It’s very important that those of you who will have equity in the business come to an agreement up front.
Hi,
Justin brings up a lot of good points.
When I read your post I kind of get the idea your talking about unsecured business lines of credit? Most start up businesses may be able to get some level of business credit depending on the principles credit. Justin talked about credit worthy partners however you could leave a partner or two out of a new corporate entity and get your credit line then add additional partners to the corporate entity after the fact.
Debt to income ratio, longevity of existing credit, job and income all play a role in getting credit. If your looking for a business line of credit it may be better to apply initially to a small local bank who offer’s business credit, if for some reason you were denied there your opposite choice is applying by phone with all initial credit partners together in one room to a national bank.
Like Justin said your service providers don’t need to necessarily be partners in the business and optionally you could strictly operate using hard money / private money loans and have no initial need to use conventional loans for mortgages.
Most start up lines of credit could be $5k to $50k and you could apply and get a couple of lines with combined totals of $10k, $25k or $50k. Most corporate entities get better credit offer’s after 2 years in business.
GR
@ justin
would it be an advantage to have the supplier and contractor as partners. i would like to think that would reduce overall costs greatly by creating a unified management system.
i am able to gain a full time job, where as the supplier and contractor already have full time jobs for over 3 years. however, the pay rate at these jobs are mediocre.
if one of us decides to leave or quit we would calculate the persons overall capital in the company and pay them off in cash to balance out their assets with us. again, im not too knowledgeable about this but im still learning
as for financing our main goal at the moment is too all get full time jobs, but we were thinking about keeping them out of the business contract and start the business with 3 full time people who are able to get a loan from the bank.
however, as a plan b, we were thinking about investing into a CIP (construction in process) condo and split all costs 3-6 ways. once built we’d sell it and hopefully use that as leverage for our banks to finance us more money.
once i iron out the issues i’ll start on a contract so that all variable are laid out but its the finances that are our biggest issue.
@ Gold River
i would be willing to take a business line of credit but in canada we dont really have small local banks. i wanted to set up a meeting with a bank advisor but i thought id get more info here first.
what are the consequences of taking a single or multiple different business lines of credit instead of one mortgage? im assuming the interest would be quite high on multiple loans.
we mainly needed the loan to pay for the purchase of the home. all repairs were originally going to be paid out of our own cash but we wanted to assume one big debt that covered both the cost of the estate and cost of repairs
Hi,
I think Justin and I are both at a loss as I don't think either of us knew you were in Canada and all you said was "we've developed a solid plan as to how were going to progress our business; however, we still dont know how were going to generate the money" which does not really indicate whether you have down payment and rehab money and need mortgage loans or whether you can get a mortgage but lack money for a down payment and rehab dollars.
You want one property loan however in the US not all properties will qualify for conventional financing before a rehab and although I do business in Canada I do not buy property up there. Typically here in the US as a fix & flipper I make about 12% to 15% clear on most properties.
This is after the purchase cost’s, rehab cost’s, sales cost’s and closing cost’s however most contractors here make about 20% profit and overhead on a contract price so when I buy a property for $80k and put $75k into rehab the General Contractor usually makes $15k of that budget as profit under this scenerio and after paying out roughly 9% in purchase and sales cost’s on a $200k FMV property there is only about $27k left for profit.
Now if you combined contractor margins with profit it comes back to $42k dollars but if your contractor is smart he is going to want 40% of each properties profit, this is a fair margin for a major rehab but if you buy the little property needing just paint and carpet your throwing away profit’s to service providers as the margin on paint and carpet is probable around $1500 to $2000 dollars as 20% of contract cost value!
If I was a contractor or service provider you made this proposal to I would ask myself “What you bring to the table” as if the contractor has a good reputation and provides good, quality service at a fair price this contractor does not need you unless you have millions of dollars to put in thus creating an expanded business relationship for both of you.
There is some “Hard Money” available in Canada however all of the ones I found only loan on property at 60% of your purchase price and don’t loan the rehab money. This basically means you have to have 40% down and rehab cost’s to complete a single deal. This is a lot of capital for a few guys just getting out of college.
You see when you cross from private investment to running and operating a business as a corporation in the US the business can obtain debt capital for small amounts as a new business. My advice for you is invest as a private party for a few years and learn the industry before starting a business and trying to negotiate positions with other parties or service providers.
I think this will give you more knowledge to base your decisions to invite partners and give you more knowledge and experience in costing and estimating your project and at what price point a property could be worth wild.
Don’t be in too big a hurry to grow until you gain some real world experience!
Good Luck,
GR
Bengali,
Well said by GR as usual. He’s right. I didn’t know you were in Canada. I think a lot of the general things I said about creating partnerships will still apply but I don’t know specifics about doing business in Canada or what interest rates you should expect there. I do still think you need to figure out what each of you will bring to the business to help figure out good equity for the partners. You want to make sure parties with equal commitment and resources get equal compensation. Ideally you’ll all complement each other so it’s not just one person working 80+ hours per week while others sit back and collect an equal share. If it were me, I would rather treat the contractor as an independent contractor hired by the business for jobs. He’s likely going to have other ventures going on besides your projects. We love our friend and worker like a brother in our business but he doesn’t have an equity stake. We provide money, find financing, do the bookkeeping, property management, handle basic accounting, do a good bit of rehab and repairs at times, search for new properties, etc. That’s why my wife and I split all profits. Other people get paid for the services they provide. These other people still make their money. They just don’t share a certain percentage of the profits.
The main thing in the beginning is to get your personal financial side of the house organized. If you don’t have good credit and a decent paying job, many doors will be closed to you. We see people post on here about wanting to quit their jobs right away to become full time investors. That rarely happens quickly. Most of the time it takes years of executing a good plan to get there.
Im currently in the best standing against my other friends who are still in school. I shouldn’t have used the word “solid” because im still researching all the major variables.
Im still confused as to what my first step should be. I realize i need experience but what would be a good way to “oil my gears”?
My only plan at this point is finish school, apply for a full time, than save money for a down payment. But, given my resources and the info ive told you, what kind of estate should i invest in?
Thanks for All your help
The first step would be to save every penny possible to create some working capital.
Meanwhile, if you seriously want to get into real estate, I would work on getting your real estate license and think about working at least part-time with a real estate firm. You will gain precious experience and a lot of working knowledge that will help when you start investing on your own. Plus, hopefully it will earn you some money too.
Then, once you have some capital, a job and stable credit, go to a few lenders and see what lending programs are available and how much money you would be qualified to get. This will at least give you an idea of what type of leverage you can use.