Financing a shop build

[Jonathan Jung]

Looking for ideas of how to finance a shop build. We are wanting to buy a property and run the business out of a shop on the property. Being self-employed, filing jointly with income from single-member LLC business, means that we don't have W-2s like most folk. For the past 5 years we've also claimed every deduction under the sun - great for lowering income taxes, bad for trying to get a loan. So this disqualifies us from many conventional loans, at this point anyway. Most regular lenders want 2 years of tax returns, and we're just now adjusting our business into showing profit, rather than reinvesting into equipment and claiming everything. So at the moment about the only property loan we would qualify for is a bank statement loan to buy a property - sounds fine except the 8.875% rate.

But what about buying a property without a shop then financing a shop build?

Any experience from those that have build a shop with a construction / land improvement loan / similar?

I have heard that construction loans require a GC other than the borrower to build the shop. Is this universally true? I wouldn't be able to build the shop myself with a loan?

Appreciate any ideas. Or rich relatives to come out of the woodwork I didn't know we had

[Jim Becker]

Have you checked with SBA about a business loan to expand/improve your business facilities?

BTW, if you need a GC but want to really do that yourself, find a retired or semi-retired builder who's willing to assist for a reasonable fee. Their knowledge might even be helpful with the project and process.

[Paul J Kelly]

Jonathan,

I have different situation, but I am building a shop in my back yard right now. The construction should start soon in the next week or so. I am financing the construction with a HELOC. I will accelerate paying it off while I still have a "regular job".

If you buy the property 'right' then you should have some equity to get a HELOC?

PK

[Jim Becker]

If you buy the property 'right' then you should have some equity to get a HELOC?

Might not be an option if it was a business property purchase. Interest rates on new HELOC are "up there" right now, too. Taking a personal loan for a business purpose may also have accounting/tax issues...that has to be carefully considered when a business is involved.

[Paul J Kelly]

You can buy it personally and then lease the space to your LLC.

PK

[Jonathan Jung]

I'm not sure how a HELOC would work, given that this will be our first property purchase.

[Jonathan Jung]

Regarding SBA loans, I'm not sure how that would work, since we were going to do as suggested above: the property is a personal purchase and the business rents the shop.

[Jim Becker]

So if you personally purchased the property, an equity loan (either fixed amount of HELOC) would certainly be a way to use available equity in the property to help fund the building but you'd be building it "personally" and then getting income from the business, typically in the form of rent. You need accountant advice about that. You'd also need to determine if that's a workable number or not. Property value is "local" and unfortunately, your unimproved land may or may not have enough value/equity available to do what you want to do.

I'd still look into SBA but maybe talk to your business accountant about this, too, before you do. They might tell you it's not going to fly or advise you how it might work with personal ownership of the property with improvements paid for by the business. It's complex and your accountant can help sort it out for you.

[Malcolm McLeod]

…

I have heard that construction loans require a GC other than the borrower to build the shop. Is this universally true? I wouldn't be able to build the shop myself with a loan?
…

Can’t say if limitation is universal. It may vary by lender, but we bought a piece of property and then later built a house. We got a bridge (or construction) loan for the build and lender would not allow me to be the ‘named’ GC. My brother agreed to be the named GC (he builds houses), but I did all the GC work. …Presumably this nicety allows the lender some leverage to get their money back from a bad GC??

All the associated loans then rolled into a conventional home mortgage in our case.

But this may all be different in your shop build. Hope it is some help.

[Zachary Hoyt]

With interest rates going up it seems like a bit harder time to do this now than it was recently. Do you have a credit score, and if so is it helpful? PayPal was offering me business loans randomly for a while, once I had enough income to not have any use for a loan, and if you do much of your business through them they might offer you one. I have no idea what the terms would be, though. Is there a way you can buy land but not build on it right away, till you have more of the money saved for the project?

I have always been debt-averse but now am having to use one of those pre-paid credit cards for a year or more because I had no credit history at all, never having borrowed any money. If I ever want to rent a car having a credit card seems to be necessary nowadays, so I am going through the process of creating credit history so I can get one, which I will then only use for that. Modern life is a bit silly sometimes.

[Jonathan Jung]

Agree Zachary, I'm debt averse as well. I wouldn't be considering this except that we're paying $2700/mo in combined rent between the house and commercial space. It sucks. It's basically 100% interest. We have good credit history and no other loans. I'd love to keep it that way, but I don't see a way out of a mortgage unless we wait, and each month we wait is more money towards someone else's mortgage.

Thanks Malcom, GC requirements might be worked around by asking a couple GC fellows I know if they'd be willing to sign up for the build knowing I'd be doing some of the work. I'll ask around.

I'll ask a couple lenders about HELOC and SBA. I'm hesitant putting all my eggs in one basket, having everything under loan with no equity, for the time period that the shop is being built.

[Jim Becker]

SBA you speak to directly. https://www.sba.gov/

[George Yetka]

I would search for a property with an existing shop. Most people, none of which you will find on this board, dont want a big shop on their property so they dont add to property values too much. If you find one you can darn near get it for free assuming you like the house and property.

[Jim Becker]

I don't disagree with George's point; fitting out an existing building of suitable size for a shop is often far more economical, but, of course, the local real estate market has to provide that option. Even for my "non business" purposes, we were not able to find an acceptable property with an existing building for my shop needs a little over two years ago when we decided to downsize. Properties in our target area with a useable shop building had houses that either "sucked" or required a huge amount of refurbishment to make them usable and they were also not numerous. I think we saw three total. Timing is everything...

[Bill Dufour]

I wonder if adding a 50 amp outlet for electric cars, and welders, and solar panels can get some sort of special government loan?
Bill D