Finding Funding for a Real Estate Venture
Q: I recently started a small business of buying and rehabbing homes for rental to the incoming military in the area. The banking crunch has halted our purchases as of now. I am looking for funding to complete the homes already purchased. Is there help out there for this type of venture? —S.P., Fayetteville, N.C.
A: As you've probably already realized, this is a tough time to get funding for a new business venture. And with home prices dropping in many parts of the country, speculative real estate development is considered particularly risky these days.
While community banks are increasingly stepping in to lend to small businesses in their communities, they typically want to see a successful revenue history and plenty of collateral from entrepreneurial borrowers. Often they are looking for accounts receivables or inventory to persuade them that you will be able to pay back the money you've borrowed. And while in the past they might have extended you credit based on the property you already own, if you've taken on substantial debt in making these purchases or if the houses you've bought are declining in value, you'll have a tricky time getting a traditional loan today.
That said, all real estate is local, and with a focus on military personnel who prefer to rent local housing, you're likely to have steady demand for your properties. Put together some documentation including home prices, local rental rates, and the number of military families who move into the area annually. Then detail the time, money, and "sweat equity" you have put into the business so far, plus how much additional money you'll need to complete the homes and get tenants moved in. Work out how much you'll charge to rent or lease the properties and how long it will take for you to break even (don't forget to include your costs for maintenance, repairs, property taxes, advertising for tenants, etc).
Armed with this financial data, talk to your local bankers. If they've not receptive, seek a partner or investor to join you in this business venture. "They could be either the owners of current properties—carrying the paper—or a third party who has capital to invest," says David Gass, founder of Business Credit Services of Las Vegas. Ask local entrepreneurs, accountants, and attorneys for referrals to private investors, or search an online database such as the Angel Investor Network. If you set up a joint venture with a third party, make sure you form a legal business entity with the advice of a business attorney. "You need a solid structure in place with the right operating agreement to protect all parties," Gass says.
If you are a military veteran, you might investigate the Patriot Express Loan says Deborah O. Osgood, co-founder of the Knowledge Institute in Exeter, N.H., and BuzGate.org, both resource organizations for entrepreneurs. "Launched in June of 2007, this U.S. Small Business Administration loan initiative is targeted toward veterans and members of the military community who want to establish or expand a small business," Osgood says. It provides reduced collateral requirements and a federal loan guarantee to qualified applicants.