Ask The Money Coach

Posts Tagged ‘Entrepreneurship’

Q: Will Forming an LLC For Real Estate Investing Help Me Get a Mortgage Loan In The Company’s Name Instead of the Individuals?
A: Although loan guidelines and bank policies can vary greatly among lenders, in general, most mortgage lenders in the United States make very little distinction in evaluating applicants seeking a mortgage as individuals versus those who are trying to get a loan in the name of a Limited Liability Company (LLC). In fact, major banks usually will analyze and underwrite a loan the same way: taking into consideration the credit rating, income and assets of all members of the LLC – just like they would look at all the financial information and qualifications of a single individual or two co-signers (perhaps a husband and wife) applying for a mortgage.

LLC Benefits: Tax Advantages and Asset Protection

The bottom line, therefore, is that while an LLC may offer tax benefits and potential asset protection for real estate investors, simply forming an LLC is not likely to help you to better qualify for a mortgage. Even under that LLC structure, banks will pull the TransUnion, Equifax and/or Experian credit files for all LLC members, and will likely require each of you to serve as individual guarantors on the loan.

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Q: How Do I Obtain a Loan To Buy Investment Property With Bad Credit? I Rent Out One Property That I Own, But I Can’t Get a Loan On It Because My Credit Score is 560.

A: When people get turned down for a bank loan, the natural tendency is to think that the bank is wrong – and isn’t giving your application proper consideration. Realize, however, that bankers specialize in making loans for profit. In the current economic climate, they’re doing everything in their power to limit losses, especially by being picky about to whom they lend money. A low credit score is a big red flag for a mortgage lender, particularly when the borrower isn’t seeking money for his or her principal residence, but for an investment property. Bankers know that owners of investment properties tend to have higher mortgage default rates than do owner-occupants. That’s logical, when you think about it. After all, if times get tough and something has to be sacrificed, the average real estate investor will sacrifice his rental property by paying the mortgage on it late, or not at all. However, that same real estate investor will try his very best to pay his own mortgage on time, in order to keep a roof over his head.

What to Do if You Don’t Get Approved

So what should you do if one or more banks say “No” to your loan application, or they approve you for such a paltry loan amount that you can’t possibly afford to buy other homes/investment property in your area?  In my opinion, if you get a flat-out “No” from a bank, you should take that as a serious sign that you are not ready to acquire additional real estate because of one or more shortcomings. Don’t take a “No” personally and don’t feel like the bank is forever rejecting you. Look at a “No” as if they bank is saying: “No – not today.” That doesn’t mean you can’t come back later – in six to 12 months – with a much stronger application. If you are turned down, take the opportunity to ask the bank directly what deficiencies you have as a potential borrower and work at correcting them. Once you find out what areas you need to shore up, and take steps to do that, you’ll substantially increase your odds of getting approved down the road. In the vast majority of cases, you should be able to get approved in one year or less, if you do what is necessary to strengthen your mortgage application.

Take Time To Improve That Credit Rating

Let’s say the bank told you “No” because you have bad credit. Now you know that you need to pay off delinquent bills, reduce debt to boost your FICO score, fix any lingering errors on your credit report, or possibly negotiate with your creditors to have negative information deleted from your credit file. I also suggest you seek help from a reputable, free, or low-cost credit counselor. “If you get denied because of your credit, first go to a credit counseling agency, because sometimes in three to six months they can help you fix any credit problems you have,” says Bob Schultz, president of New Home Specialist Inc. in Boca Raton, Florida. Schultz started selling new homes in South Florida in 1968, and has been in the business for nearly 40 years. He now works with builders and realtors, and has been recognized by Builder Magazine as one of the “50 Most Influential People in Home Building.”

“Get your credit back on track, and while doing that, start disciplining yourself to save more money toward a down payment,” Schultz advises. “Six months later, when your credit is improved and you have more money in the bank, that looks good to the bank.”

Consider a Strong Co-Signer … But Know the Pitfalls

Take heart in knowing that by waiting just a short time to fix any problems in your loan application, you’ll actually wind up saving yourself many thousands of dollars. That’s because even if you did get approved for a mortgage with a weak application, you’d be forced to pay a higher interest rate and probably additionally fees just to get the loan.

If you absolutely dread the thought of waiting six months or more, here’s another possible strategy that Schultz recommends: “Get a strong co-signer: Mom or Dad, or someone who trusts you enough so that they’re willing to make the payments if you can’t.” Should you take this route, be absolutely certain that you can make your mortgage. If you don’t, you’ll jeopardize your own credit standing, and your co-signer’s – something that could ruin a relationship for life.

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Q: How Did The Mortgage Meltdown and Wall Street’s Woes Lead to the Credit Crunch?

A: The economic crisis that initially began when sub-prime mortgages started unraveling in 2006 and 2007, became a full-scale financial meltdown in 2008, and continues today to have a huge impact on the overall economy, as well as on you and me. At its core: the crisis was about debt. Or “leverage” as they call it on Wall Street. Call it what you want: the simple fact is too many individuals and far too many institutions borrowed way more than they could afford to repay.

A Nation of Debtors

People racked up credit card debt. They bought expensive cars. And, of course, they stretched for that loftiest of goals embodied in the American dream: a home. During the height of the real estate boom, it was common for cab drivers, teachers and others earning $40,000 or so to take out mortgages for $400,000 or more. As long as real estate values kept escalating, the party continued. When the credit cards got maxed out, people simply used the equity in their homes as collateral to get cash from banks. Voila! The credit card bills were paid once again. Consumers could go back to spending. The banks were satisfied because they were getting repaid, and the economy was humming along nicely. Everyone was happy.

But you know the old saying: “What goes up must come down.” So it was with real estate. Starting around early 2007, house prices stopped rising, and people were no longer able to use their homes as piggy banks. All of a sudden when those credit card bills crept up, they couldn’t be paid off by tapping a home equity loan or a home equity line of credit. The first people to be hit were so-called “sub-prime” borrowers, those with less-than-perfect credit ratings. They saw the interest rates on their adjustable-rate mortgages shoot up, often causing their mortgage payments to skyrocket. Scores of borrowers struggled to keep up, but they simply couldn’t. Most had absolutely no savings. Plus, millions of people began receiving pink slips, as corporate America went through a wave of layoffs that endures to this day. Without a job and with no cash reserves, how can you pay your house note and other bills? So many cash-strapped homeowners went 30 days past due on their mortgages. Then those 30-day delinquencies turned into 60 or 90 days. Soon, a cascade of foreclosures rippled through the housing market.

Who Is To Blame for The Financial Crisis?

Needless to say, the consumer was not solely to blame in this whole mess. The financial community definitely played a critical role in creating the problem, and allowing it to persist. Banks were way too lax in extending credit, often making the riskiest loans to borrowers with the worst credit. Banks, brokerages and other investors also made the mistake of buying investments called mortgage-backed securities. These were essentially thousands, or hundreds of thousands of mortgages, all packaged together as one big investment. In the heyday of the real estate boom, mortgage-backed securities were big money makers. After all, their value was tied to the worth of rising home properties. Once the real estate crash happened, however, these investments went belly up. Finally, lenders, regulators and credit rating agencies such as Moody’s and Standard & Poor’s all should have been sounding the alarm bells about rising debt and credit delinquencies. Instead, they failed to accurately envision the very real possibility that a massive wave of consumers – including those with poor and good credit – might not be able to handle their overall crushing level of debt. But that’s precisely what happened in 2007 and 2008.

Once homeowners began defaulting on their mortgages, and fewer people paid their credit card bills, student loans and other debts, banks started to feel the sting. The money that banks had relied upon – the money that consumers borrowed and were supposed to repay – simply wasn’t there. Before long, the financial crisis spread from individuals to institutions. In the financial world, it’s common for banks to lend money to each other at low interest rates. Usually, these are very short term loans; they typically get repaid as quickly as 24-hours, or about as long as one month. But by 2008, banks became leery of lending to each other, for two primary reasons. First, banks wanted to hoard their cash to protect themselves against future losses. Second, and most important, banks were terrified of making big loans in an uncertain environment. They feared that other banking institutions might fail to honor their debts, just like consumers did. Adding to the fear and worry, nobody knew exactly how many bad loans banks had made, or how many investments they had in toxic sub-prime mortgage debt. So just like that, the credit markets came to a grinding halt. Nobody was lending money to anybody. Period.

The Credit Crunch Reaches a Tipping Point

It was one thing for a consumer credit crunch to take place, as it did during the summer and fall of 2007, when it was terribly difficult to get a mortgage loan. But when the credit crunch spread in 2008 to banks being unwilling or unable to make loans to each other, well that was another story. That corporate credit crunch proved to be too much stress on the system. The spread of the credit crunch to the corporate market – where even banks themselves couldn’t get a loan – marked a critical tipping point and the height of the financial crisis. In January 2008, Countrywide Financial Corp. just managed to avert complete disaster, by selling itself for $4 billion in stock to Bank of America. Without that deal, many feared that Countrywide, which had been suffering under the weight of bad mortgage loans, would have certainly collapsed.

Wall Street Implodes

Before long, however, the fallout from the credit crunch and soured mortgage loans could not be contained. There was carnage on Wall Street, as centuries-old institutions failed or got bought out – some of them seemingly overnight. In a matter of months, three of America’s top five investment firms went under. Bear Stearns collapsed in March 2008, and was sold to JP Morgan Chase for the bargain-basement price of just $2 a share, a deal that valued Bear Stearns at less than $240 million. (That $2 per share price was later raised to $10 a share. But even that was small potatoes, since earlier in 2008 Bear Stearns’ stock had traded at $80 a share, and Bear Stearns had been worth $20 billion). Then in September 2008, two other major events rocked Wall Street. Lehman Brothers went bankrupt, after federal authorities refused to rescue the company. Soon after, Bank of America purchased the once-mighty brokerage house Merrill Lynch for about $50 billion in stock – less than half what Merrill was worth the prior year.

The U.S. Government Steps In to Prevent a Systemic Banking Failure

At the peak of the crisis, when it appeared the entire financial system was on the verge of collapsing, the U.S. government got actively involved, stepping in with massive efforts to provide stability. Banks were allowed to borrow money easily, and at cheap rates, directly from the government. The government took over mortgage companies Fannie Mae and Freddie Mac, as well as insurance giant American International Group Inc. (AIG). Also, the government began more closely scrutinizing the health of banks and other financial institutions. This led the federal Office of Thrift Supervision in September 2008 to shut down the 119-year-old Washington Mutual Inc., which had been America’s largest savings and loan. Once again, JP Morgan Chase was a shrewd buyer, snapping up WaMu’s banking assets for a mere $1.9 billion. By October 2008, Congress passed a gigantic $700 billion financial rescue package, officially called the Emergency Economic Stabilization Act of 2008, to bail out Wall Street and to encourage banks to start making loans again. If all this wasn’t enough, the U.S. Federal Reserve and other government entities also launched coordinated fiscal and policy actions with governments around the globe to stop the growing financial crisis from being felt worldwide. Commenting on the government’s unprecedented role in shoring up some financial institutions, former Federal Reserve Chairman Alan Greenspan said in an ABC interview: “This is a once in a half-century, probably once-in-a-century type of event.”

The Credit Crunch Rages On … Squeezing Individuals and Businesses Alike

Despite Greenspan’s proclamation, the financial crisis rages on. In late October 2009, commercial lender CIT Group Inc. became one of the latest high-profile casualties of the credit crunch. CIT had been one of America’s biggest providers of loans to small and medium-sized businesses. But the 101-year-old company was forced into Chapter 11 bankruptcy – the fifth largest bankruptcy in U.S. history – after CIT’s own lenders refused to extend it more credit and CIT’s financing evaporated. Unfortunately, CIT Group wasn’t alone in its woes. In November 2009, another lender to small businesses, Advanta, also filed for Chapter 11 bankruptcy protection. Commenting on the company’s unsuccessful efforts to survive the credit crunch, Advanta CEO Dennis Alter said in a statement: “The economic debacle over the last two years devastated Advanta’s small business customers and Advanta itself.”

Unfortunately, there were more than 1.4 million consumer and business bankruptcy filings in 2009. So the bankruptcy problem and the credit crunch is expected to last for years to come.

A Facebook fan asked for some tips on starting his own business. It does not come as a surprise that although America may be in a recession with a rising job less rate, many laid off workers are contemplating a life of entrepreneurship. If you’re thinking of becoming your own boss, there’s much to heed before you start dipping into your retirement savings or severance pay to launch your own business.

Here are six quick tips for entrepreneurs trying to finance a start-up or expand existing operations:

1. Do seek “trade credit” from vendors and suppliers. Too many entrepreneurs dream of going to a bank and getting a business loan or line of credit for their enterprise, but maybe you don’t need a traditional bank loan at all to launch or grow your business. If you can get your vendors and suppliers to agree to provide you with trade credit — i.e. the ability to pay for goods and services over time — you can creatively and more frugally run your operation.
2. Do request major funding long before you need it. Realize that getting money from “angel” investors and venture capitalists can be a longer-than-expected process; it often takes 6 to 12 months to secure. See the “How to Get Funding from Angel Investors” article from the Wall Street Journal.
3. Don’t feel compelled to buy everything. Ask yourself: Do I really need to purchase equipment, furniture, computers, etc? You may be able to get by, temporarily, by bartering, or even by renting and leasing equipment. And that’s OK!
4. Do get “buy in” from your spouse/partner. Many new (and veteran) entrepreneurs will tell you one of the biggest dream killers they’ve encountered is an un-supportive spouse. Make sure your partner is on board with your entrepreneurial ambitions. If not, you’ll face a host of financial arguments and money-battles that will be counter-productive to you building a business.
5. Don’t let your personal credit rating lapse. Amid the current environment, your credit standing is more important than ever. Guard it jealously. Pay all bills on time. Only take out loans/credit when you truly need it. The higher your FICO scores, the better loan rates and terms you’ll get when it is time to do business with a bank —or even just getting a corporate credit card. See more on how to get your financial house in order.
6. Don’t “bet the farm.” Smart entrepreneurs don’t “roll the dice” and risk everything. They take risks, but they’re calculated risks. Don’t gamble everything: 100% of your savings, your credit, putting your home up, etc. in the hopes that you’ll create a successful business. Be willing to invest in your business of course, but not foolishly, and and not at the expense of everything else.

By Lynnette Khalfani-Cox, The Money Coach

When the entrepreneurship bug strikes, you want to be sure to obtain the licenses and permits you need. No matter whether you’re in the start-up phase, or you’re growing an existing enterprise, you want to always run your business legally.

The federal government’s website http://www.business.gov explains everything you need to do to register a business and to make sure you’re operating according to the law for any necessary permits, licenses or registrations that may be required

To register a business, there five basic steps:

1. Determine the legal structure of the business (sole proprietorship, LLC, corporation, etc.). The Business Incorporation page on business.gov has more information on this topic. See http://www.business.gov/register/incorporation/.
2. Register your business name (using a “DBA”, “Doing Business As”, “Fictitious Name” or “Assumed Name” as the legal name of your enterprise). Get the DBA filing requirements for every state, along with the District of Columbia, at the Business Name Registration page: http://www.business.gov/register/business-name/dba.html.
3. Obtain a Federal Tax ID (also known as an Employer Identification Number (EIN) or a SS-4, from the Internal Revenue Service). Call the IRS at 800-829-4933 or apply for an EIN online.
4. Register with your state revenue agency (you must do it after securing a Federal EIN). Depending on your business, you may need to get a Sales Tax Permit or a Vendor’s License from your local and/or state government. Start the process by learning the rules and requirements in your state, which can be found on the State Tax Information page: http://www.business.gov/finance/taxes/state.html.
5. Obtain licenses and permits (you may need a general permit or an industry-specific one). Read the Licenses and Permits guide at: http://www.business.gov/register/licenses-and-permits/. It includes a search tool that will explain, step-by-step, everything that is required for your business.

Get more details about each of the five steps described above by going to the ‘Steps to Registering a Business” page of the government’s website.

Good luck with your business!

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