Real Estate and Mortgage Crisis Part II: The Link Between Home Ownership and Entrepreneurship

By Michael Taylor

Let’s say you are a twenty-something entrepreneur just started down the road to owning your own business, and lets suppose I was your grizzled-veteran thirty-something entrepreneur adviser.

Further, let’s suppose you wanted to know the #1 most important thing you could do to prepare for owning your own business. I would like to think I could surprise you with my #1 piece of advice: “Buy a house first.”

Did I surprise you?

If you can survive the process of purchasing a home, and in fact be successful at it, you’ve passed the first test of entrepreneurship.

I think of the link between home ownership and small business as testing your skills, your ability to get financing, and finally, your stamina.

In terms of skills, I know I didn’t have any training before I bought my first real estate property in 1998 and my second in 1999. Each time the skills I learned prepared me unusually well for building a small business.

Take hiring a good real estate broker, for example. When my broker told me that the residential building I was buying into didn’t exactly have a perfect financial history, well, let’s just say that he was putting it mildly. The building, it turned out, was basically being run by a mobster.

The most important lesson from that experience, of course, was that my broker worked for the seller. As a small businessman, I always try to remember who people are really working for.

Later, when the real estate attorney I hired took three weeks to review a standard real estate contract, that experience too offered an important lesson in hiring people who can get things done in a timely way. I was one of dozens of clients all at the mercy of his work schedule and, most likely, his golf game.

Hiring specialists who focus on Cedarcrest continues to be a key skill for my small business.

So, too, is financing. I borrowed small amounts of money from three different family members to scrape together the down payment on my first apartment. I carefully wrote out promissory notes, figured out an appropriate rate of interest, and sweated the fact that I was breaking the time-honored rule of never taking a loan from family, at the risk of losing both money and the relationship.

The down-payment loans worked out fine in the end, and I’d like to think my family was predisposed to a financing pitch from me when I started my business 6 years later.

Another interesting financing tool I learned from my first property acquisition was owner-financing. My first real estate purchase in 1998 was raw land in a rural area of New Mexico. The seller owned the property next to mine, and offered to sell me the parcel for 50% down, and 50% over time. He kept the note and earned interest on the mortgage balance, while I was able to pay him over time for a low monthly payment.

When I had saved up enough money about a year later, I paid him off early. In this situation, a bank loan was not the most efficient way to finance the purchase, and we both ended up better off through seller-financing. I had no idea at the time how important seller-financing was as a small business tool, but it turns out to be something which we frequently work with at Cedarcrest.

Finally, the most important entrepreneurial skill learned in the process of purchasing real estate is stamina…It always takes twice as long and three times as much effort as you expected. If you can successfully make it through purchasing real estate, you’re in good standing to own your small business.

You may have noticed that I left out of the discussion above a few more advantages of home ownership as an entrepreneur, but they deserve quick mention as well.

1) Home ownership signals to banks or other investors that you are a forward-thinking, responsible, investor. At Cedarcrest, for example, one of the main things we ask before taking on a client is whether he or she owns a home, largely because of what it says about the person.

2) Even more specifically, a steady history of paying your home mortgage debt will boost your credit rating. Your 30-year mortgage debt at a prime rate represents the easiest and lowest-cost borrowing terms available to mere mortals like us, which makes it easier to establish the good track record for your credit rating. And you’ll need that good credit rating as a small business owner.

3) Home equity lines of credit are an essential tool for a small business owner having trouble getting financing from a bank, since banks really don’t like to lend against anything other than real estate. See my early post on this topic.

4) Wealth creation through home ownership is a key leg up for the small business owner, and certainly was a key for me in getting Cedarcrest started.

While I see home ownership as a key step, in fact the key step to entrepreneurship, in the next BizBox post I’ll talk about some of the dangers of the housing and mortgage slump for small business owners.

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November 14, 2007 12:16 PM