Business Loan to Start Investing?

Question

Hello all,

I am new to the real estate world and looking to start a business locally. My wife and I are young with a baby and don't have enough money to start buying real estate on a personal level. Is it possible to start a real estate business (maybe more adequately a property management business) via a business loan? If not, is a line of credit an option (or any different at all)? I know this business can be fruitful when done well, but I just don't have the capital to start without some sort of assistance. Thanks in advance for any and all comments.

Christopher B. · Answer

With a Business Loan, you could purchase a property wholly, or potentially utililize the business loan as the down payment when purchasing the property with a mortgage. Some banks don't like borrowed funds for the down payment, and you will want to ensure the income from the property covers the business loan payments in addition to the mortgage. I don't see anything wrong with it, if you analyze the property right.

Have you considered a House Hack?

Dennis Wayne · Answer

In order to be an investor you gotta have something to invest . 100% leverage on a business you have no experience in is a recipe for failure . Save then start . You also gotta have reserves

Cade Powell · Answer

All, thank you for the input. We are currently looking at potential places to house hack in order to start building our portfolio. Thanks so much.

Christopher B. · Answer

I'm using #2 as part of my strategy also.  This is similar to leveraging one loan for the other, except the first loan in secured, so better terms typically.

Stephen DeThample · Answer

Find 3.5% down for an FHA loan and house hack something.  It could be a single family you rent rooms in or a 2-4 Plex that you live in 1 unit and rent the rest.  After 1 year you can repeat the process.

Good Luck!

Nathan Gesner · Answer

I would add: why would a bank loan to someone with no revenue and no experience?

You should look for a job at an existing property management company. This will give you a steady income and some accelerated learning. Spend a year learning the ropes and figuring out if this is the path you want to take. Then you can position yourself to step out on your own.

Starting a business could easily take you 1-2 years before you even earn enough to support yourself. Not wise.

Tucker Cummings · Answer

Maybe not the most popular thought, but I wouldn't recommend leveraging a loan in order to leverage another loan. For example, a business line of credit leveraged to get a loan. I'd have two recommendations:

1) Patiently and diligently save up for a down payment. 20% for traditional loans, but maybe you could get 3.5% on an FHA loan use that to house hack. As recommended by @Christopher B.

2) Use the BLOC for a BRRRR process. This is what I'm doing, but I'm using a HELOC that's on another property of mine. That way, I can use the line of credit to purchase and rehab the property, then fully pay it off at the end of the project. This is higher risk, but personally I think it is the best way to use a line of credit.

Hope this helps and good luck!

Marty Johnston · Answer

@Cade Powell I'll just echo what the others have said here regarding a business loan - funding for startups can be very tricky without any revenue - you have to show the ability to repay the loan, so without revenue, no repayment!Alternatively, if you have a consistent W-2 job and earn at least $30,000+ /yr, with a 680+ FICO,a nd DTI <40, you might be a good candidate for leveraging unsecured personal debt to achieve your goals. We structured this as Gap Funding and Startup capital for our clients regularly and it works beautifully! However, you have to really look at the numbers closely... Personal Loans have no collateral (hence, unsecured), and are ultimately a signature loan. These are very high risk loans from a lender's perspective, and hence highly priced - generally 10-18% (as low as 6%), and fully amortized over 5-years, meaning a sizeable principle and interest payment every month.

A few things you'd really need to dial in on before entertaining this option (it's vitally important to you and your beautiful young family!

• What type of investing do you plan on doing? Using this type of funding for rentals doesn't generally work well unless it's a result of a BRRRR. Reason being, if you aren't building in significant equity/value add while using these types of loans, it can eliminate most, or all of your monthly cash flow (until the personal loan is paid off), and you may be at the risk of not being able to pay it off. Which, by the way, if you intend to roll the unsecured funds into your next deal to continue to scale, the risk is dminished slightly because you're re-using the funds again, and your ROI increases greatly!
• 
• Will you make more than the cost of capital? If not, this isn't the route for you. Simple Math there. A - B = C

In short, many investors utilize Gap Funding in this format to Scale significantly faster when utilized correctly. You just need to figure out you 'why', and see if it makes sense.

Hope this helps! Shoot me a DM if you'd like to chat more on this.

Drew Sygit · Answer

Why would a bank lend money to a brand new company, with no revenue?

You will have to cosign for the loan and the approval will be based upon YOUR credit worthiness.

The positive is that you will start establishing a business financial history, which will come in handy in 3-5 years:)

You may find a hard money lender that will do something different, but you will pay substantially more in rate & fees to offset their higher risk.

Business Loan to Start Investing?

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