Q: I am interested in starting a real estate development company. I would like to purchase and renovate mid- to lower-income properties and then opt to sell or lease them to families in urban areas. What advice can you give for helping me find funding, and are there some things I could be doing to minimize my risk?
A: First, congratulations to you on deciding to put some concrete plans into motion. You've chosen a very noble business--helping families realize their dream of being in a home. Revitalizing communities while creating wealth for yourself is an outstanding formula for success.
Let's talk about the risk factors before we go into the funding. Today, redevelopment of urban areas is happening all over the country, and in the areas of DC, Virginia and Maryland, the market for this endeavor happens to be pretty good. There is plenty of supply and a hearty demand. Of course, there are so many details involved with the purchase and renovation of real estate that I highly recommend you find a trusted real estate attorney or other qualified advisor who can assist you in setting up the proper structure for your company. Having the right corporate structure, the appropriate licensing and a clear understanding of the zoning and development issues in the neighborhoods you're targeting will help keep your exposure to a minimum. The most important thing you can do right now is arm yourself with information and look in every possible direction for resources and potential roadblocks. Try to project what some of your risks may be, such as not finding a buyer for a refurbished property or underestimating the cost of a renovation. It's better to prepare for the most extreme scenarios now, rather than be caught off guard and unprepared if a potential conflict arises. This is not to say you should go into the project with negative possibilities hanging over you; just do it with your eyes wide open.
As for funding options, you're in luck if you've been able to build and maintain a clean bill of financial health for yourself. Unless you are coming to the table with a substantial investor with a track record, your personal credit will play a very active role in whether or not you will obtain the funding you need. This is true for any small start-up looking for seed money. In your case, the home will be the collateral, so you're in better shape than, say, someone who wants to start a Web-based company.
The good news again here is that while other areas of our economy are unstable, real estate is still a good investment with a fair to better rate of return. Because this will be investment property for you, you'll again want to rely on a real estate and legal expert to guide you. I highly suggest you spend some time online, visiting, reading and absorbing the vast amount information and resources available. Here are some good places to get started:
- www.hud.gov: This is the site for The U.S. Department of Housing and Urban Development.
- www.fanniemae.com: Fannie Mae's mission is to "tear down barriers, lower costs and increase the opportunities for homeownership and affordable rental housing for all Americans." This site has a wealth of information for you.
- www.sbaonline.sba.gov: This site from the SBA provides information on special funding for real estate and land development to those small businesses that qualify. You'll also want to visit www.mbda.gov, the site for the Minority Business Development Agency.
- There is another site I've run across that's packed full of helpful information: www.minorityprofessionalnetwork.com. On this site, you'll find many links to potential resources and from there, a wealth of other possibilities.
Also, take some time to look closely at each community, district, town and state in which the properties are located. There are several incentives for those who wish to participate in the revitalization of communities, and the funding to help you get started is available.
Make sure you have a solid business plan complete with contracts, as well as a clear and organized way to document and track your work every step of the way. And remember this: It's about relationships. You're not trying to acquire money or property; you're building relationships with people who will help you realize your potential. The money for your first purchase could come from anywhere, but wouldn't it be nice if it came from the source who will be there with you for the purchase of your fifth investment property and someday--who knows?--your very own development.
Robert L. Wallaceis the founder of EntreTeach LLC, a new Web portal designed to foster the development of minority and women entrepreneurs. He is also the founder and chairman of The BiTH Group Inc., an IT consulting firm that provides services in management consulting, telecommunications, PC support and integration, and document imaging services.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.