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How do I build my own business in real estate?

Veteran

Novian Davis Fort Worth, TX

Hello, I've been looking into buying real estate or land in Texas and making it profitable. The options I'm looking at are an RV and/or trailer park and buying/building duplexes (triplex, quadplex). I'm not sure where to start. I'd love the opportunity to hear pros and cons and be able to bounce off questions with someone who's been down those roads

24 October 2021 4 replies Small Business

Answers

Advisor

Matt Johnson Chicago, IL

Novian,

I think you'll find that improving land for use as an RV or trailer park is going to be far different than being a real estate investor with a focus on multifamily homes.

In the case of the former, you would need to pay for any improvements to the landscape, additions of any improved surfaces or semi-improved (gravel) roads, the addition of water or sewer lines as well as electricity. This would be heavy capital expenses up front, requiring your own assessment of the market and a proper business plan in order to gain financing from a bank as well as any funds from investors. Debt financing is common for startup companies, but you'll also need to maintain the grounds, pay for any repairs, market the property, and develop an operation on the ground.

A friend of mine used to buy multifamily properties with the VA loan and rent out the additional units as a form of passive income. The trick here is that property values in many areas are at all-time highs and you need to account for a certain amount of turnover, vacancy, or bad debt write-offs from tenants who refuse to pay. There's also legal costs involved and the cost of property taxes. For Texas, that amounts to 2% of the property value (tax basis is at the price it is bought so buying at a market high means paying more tax until it is sold).

In any case, a VA loan lets you lock in low interest rate without a cash down payment and you won't pay PMI (Primary Mortgage Insurance) since a portion of the loan is backed by the VA. This is a massive advantage over a conventional mortgage which requires a 20% cash down payment to avoid the expensive PMI fee. You also need to agree to make that building your personal residence for 2 years before it can be used as an investment property in its entirely.

The downside of the VA loan is that you can't transfer it to an LLC which is what many owners of multiple properties do to protect their personal assets from liabilities arising from the business, so if you build a business and intend to put assign the mortgage to it, you'll need to refinance - though you could wait until you have at least a 20% equity stake since the value will be reassessed at the time of your refinance.

The bright side of this route is you can use it for passive income and it isn't nearly as operationally intensive as running an RV or trailer.

26 October 2021 Helpful answer

Advisor

Lowell Sandoval Seattle, WA

Novian,

This type of question is very challenging to address without knowing your current situation, financial backing available and your personal investing objective. There is a lot of various paths you can take. Until more background is shared, I would suggest looking at Passive Income strategies related to Real Estate that offer tax benefits, and then how Cash Flow works with good debt, bad debt, income and outgoing spends.

Hope this helps.

Lowell

Advisor

Jeremy Serwer Woodstock, CT

Hello Novian,

I'm a real estate consultant and broker specializing in retailing, shopping centers, etc. Have also owned residential income properties -- 2-famiy, 3-family, and single residence homes.

While it would be hard to excel beyond Matt Johnson's advice here, I'll add that one advantage you'd have in Texas are laws more favorable to landlords than to tenants -- both residential and commercial. Living in New England, I can assure you this is not a small advantage.

Additionally, your capital requirements for buying existing properties (down payments, closing fees, fix-up costs) should be a lot less than developing properties from the ground up.

Finally, in some states 4-unit and up residential properties are considered commercial, vs residential, and that can affect mortgage rates. I don't know about Texas, but it could be worth checking out.

Happy to talk further if you wish -- either by e-mail or phone. You can contact me through this ACP website, or jeremy@theserwercompany.com.

Good luck to you --

JS

Advisor

Jerry Welsh Middleville, MI

Reach out to a local Chamber of Commerce, seek some advise from a SBA representative. Also seek out mentors in the field, that will provide you with information. Be clear you are seeking information, many business owners are reluctant to provide information that gives business away. Informational Interviewing is also a great opportunity, again seeking information. Thanks for your service and God Bless.

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