Real Estate as a Business

[Sachin T.]

Wanted to find out what people think of this line of thinking :

  1) All your buy and holds are a business

  2) You borrow money with a downpayment, just like in any business you would have some stake (say a VC funding) and then borrow major money from bank for your business.

 3) You give the profits back to VC (so in this case the VC is the person giving your downpayment, typically yourself on the downpayment amount that was provided.

 4) You take a portion of it and grow your business

So say you buy a 100K property with 25K down, now 25K is the money you have loaned for your business on which you expect a return say 8 or 10% or more depending on the net cashflow and profit of business that comes from the rental income.

I love this way of thinking, EXCEPT in a business when things don't work, you declare bankruptcy, the VC loses his initial stake (downpayment) and the banks loose their funding as part of bankruptcy vs in a typical SF Fannie Freddie loan you CANNOT declare that and you would still owe money to bank after the business assets have been liquidated (property has been sold etc.). 

So this line of thinking, real estate buy and holds is a business BREAKS because of the recourse nature of Fannie-Freddie loans, thoughts ?

[Cody L.]

Originally posted by @Sachin T.:

Wanted to find out what people think of this line of thinking :

  1) All your buy and holds are a business

  2) You borrow money with a downpayment, just like in any business you would have some stake (say a VC funding) and then borrow major money from bank for your business.

 3) You give the profits back to VC (so in this case the VC is the person giving your downpayment, typically yourself on the downpayment amount that was provided.

 4) You take a portion of it and grow your business

So say you buy a 100K property with 25K down, now 25K is the money you have loaned for your business on which you expect a return say 8 or 10% or more depending on the net cashflow and profit of business that comes from the rental income.

I love this way of thinking, EXCEPT in a business when things don't work, you declare bankruptcy, the VC loses his initial stake (downpayment) and the banks loose their funding as part of bankruptcy vs in a typical SF Fannie Freddie loan you CANNOT declare that and you would still owe money to bank after the business assets have been liquidated (property has been sold etc.). 

So this line of thinking, real estate buy and holds is a business BREAKS because of the recourse nature of Fannie-Freddie loans, thoughts ?

 All my Fannie loans are non recourse. They’re my only non recourse loans actually.