Looking to tap into the multi-expertise of the forum.

Me: Teacher looking to leave.

Wife: Homeschooling mom who also sells on eBay.

We currently lease office space where my wife does eBay and home schools during the day. She is outgrowing the space and will need something bigger. Instead of just moving to a larger space, we are reevaluating our whole work-life situation as a family and would like to make some changes.

As an unhappy teacher, I would like to join my wife and expand her eBay business from a one person, part-time operation into a two person, nearly full-time (each) business. We have also wanted to work/live at the same location for a while, to better accommodate home schooling as well as for a better work-life balance. The first thought would be to buy a larger house and land that would allow for (or include) an out building for the eBay business. We can't afford this.

We started thinking outside the box and began looking for downtown retail buildings that could accommodate second floor living space. Instead of paying a mortgage on a more expensive residential property, we could be making an investment in commercial real estate where rental income could help the financial equation.

We have our eyes on a property that is just shy of 14k sq/ft. First floor, street level is currently fully occupied by two businesses. Second story has apparently been unused for decades. We would like to buy the building and renovate the second story into a residence for ourselves, office space for our business, and possibly another office for lease, keeping the existing retail as-is.

We just made contact with a commercial realtor this past week. We know almost nothing at this point about purchasing/financing commercial real estate. Lots to learn.

Our situation and what we want to do is very non-traditional, as far as I can tell. Here are all the details I can think to give:

Current home should be worth around $160k. Balance on mortgage is $90k. Commercial property is overpriced at $200k. I anticipate a realistic value at $130-150k. We're looking to build a 2nd floor living space of around 3,000sf, four bedroom, 2.5 bath. The rest would be office space.

I think we need to create an LLC for purchasing the property. Would we include the eBay business in this, or would it be only for property management? I'm guessing it would be best to do it for the property only, and then we'd lease the space (residence and office) to ourselves so everything looked better on paper for a lender. We'd then do another LLC for the eBay side so we can start buying inventory at wholesale. Not sure if any of that is right, though.

My biggest questions involve financing. We'd need a down payment and renovation funds. We can't access the full equity in our house because we can't sell/move until the new space is livable. It looks like we could maybe pull out around 40k via an equity loan or line of credit. 20% down on $150k for a standard commercial mortgage doesn't leave much for renovation. 25% knocks it all out.
What kind of financing options are there that would allow us to borrow against the renovated value of the property instead of its current value? What about bridge loans? They seem risky, expensive, and hard to get. What about a 504 loan? Those seem tied to job creation, which we wouldn't be doing. What other options are there?

More info about the property location and situation: It's in a downtown area in the Midwest that is starting to see some good investment in rehabilitation. It is across the street from a museum and several blocks from an art center and the public library. A commitment was recently announced by a major hotel chain to renovate a currently vacant historic hotel just a block away, and they are also building an new hotel in the same area. The city is encouraging investment in existing structures and the type of work/use I'm intending. Property values and investment outlook for the property I'm looking at should be decent at worst.

I know that the first property I look at for this may not be ideal or pan out at all, but I'm sure any advice I get for this situation would apply when looking at other properties as well. I just need an education.

Thanks in advance for any help!

Are there any zoning laws that might prevent a residence from existing within a commercially zoned building?

I think one of the reasons your idea is uncommon is because many people would be VERY cautious about the ideal of risking their home being lost in the even something goes wrong with a business.

The whole point of an LLC is that it protects your personal property, but it sounds like you'd be giving up your personal property to put it all into a startup business?

What happens to your "home" if you have a run of bad luck with unexpected expenses and tenants moving out?

The city is very open to this, and my agent has brokered several large-scale commercial-to-residential conversions in the same town in the last few years. He says zoning would not be an issue.

Can't particularly help with your questions, but just want to make sure you have considered all expenses.

If you leave your teaching slot, are you prepared to pay all of your health insurance? That can be upwards of $15k - $20k a year unsubsidized if you are too young for Medicare. You can't rely on the ACA, since there are no guarantees it will be around in a year or two.

Likewise, you will be on the hook for your full Social Security payment - so double what you pay now.

Longterm, if you are in a pension plan - how will it affect the payout? My wife has 23 years in her pension, if she retires today - it pays $700/month for her life. If she stays seven more years, that monthly goes to $2500. That is a difference of more than $400,000 over 20 years.

Are you prepared to replace a furnace or Air conditioner if it goes out on the commercial property? That could be $10k easily.

I'm not trying to shoot down your idea, just want to insure you are looking at all aspects.

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bik
I think one of the reasons your idea is uncommon is because many people would be VERY cautious about the ideal of risking their home being lost in the even something goes wrong with a business.

The whole point of an LLC is that it protects your personal property, but it sounds like you'd be giving up your personal property to put it all into a startup business?

What happens to your "home" if you have a run of bad luck with unexpected expenses and tenants moving out?

There's always risk, and that's a big concern (this is scary), but the potential upside seems worth the risk. For what we want to do, I'd rather invest in this way than pour even more money into a traditional home-owning situation. Basically, just getting tired of paying and working for "the man." I'd like to be "the man." It just seems like a good foot in the door to get started with commercial property ownership and start to think a little more entrepreneurially, while improving my family's general situation.

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Ombligo
Can't particularly help with your questions, but just want to make sure you have considered all expenses.

If you leave your teaching slot, are you prepared to pay all of your health insurance? That can be upwards of $15k - $20k a year unsubsidized if you are too young for Medicare. You can't rely on the ACA, since there are no guarantees it will be around in a year or two.

Likewise, you will be on the hook for your full Social Security payment - so double what you pay now.

Longterm, if you are in a pension plan - how will it affect the payout? My wife has 23 years in her pension, if she retires today - it pays $700/month for her life. If she stays seven more years, that monthly goes to $2500. That is a difference of more than $400,000 over 20 years.

Are you prepared to replace a furnace or Air conditioner if it goes out on the commercial property? That could be $10k easily.

I'm not trying to shoot down your idea, just want to insure you are looking at all aspects.

Thinking of all those things, yes. When I run the numbers for what kind of net income we'd need, I'm adding all of that in. We already pay out of pocket insurance for my wife and kids. It'd just be me going on with them. That's also part of the reason for looking at a commercial investment property instead of a house. Renters should pay for most/all of the building (ideally), instead of us making a house payment. My wife is paying in fully on SS now. It just be more, but with more income. I have 12 years in on the state-run pension fund. That'd stay there for safekeeping or if I return to teaching.

My Dad, who had his own business, always used to say, "Where business begins, friendship ends." Unfortunately he didn't always follow his own advice, but that's another story.

My take-away from his advice is to keep your personal life and your business life separated - physically, emotionally and psychologically. Having your place of business physically too close to your home makes it extremely difficult to separate personal and business issues, needs and concerns. It becomes far to easy to put in extra time at work when that time really needed to be invested in the home life and often that doesn't become apparent until the damage in the personal life is beyond repair.

And as others have stated, there could be zoning issues (although you seem to have looked into that), issues with maintenance, tenants, insurance, etc to say nothing of what happens if the business fails or needs to expand. Best to keep the two separate and from what I learned in my own experiences, at least a 30 minute commute apart physically.

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bobinmurphy
My Dad, who had his own business, always used to say, "Where business begins, friendship ends." Unfortunately he didn't always follow his own advice, but that's another story.

My take-away from his advice is to keep your personal life and your business life separated - physically, emotionally and psychologically. Having your place of business physically too close to your home makes it extremely difficult to separate personal and business issues, needs and concerns. It becomes far to easy to put in extra time at work when that time really needed to be invested in the home life and often that doesn't become apparent until the damage in the personal life is beyond repair.

And as others have stated, there could be zoning issues (although you seem to have looked into that), issues with maintenance, tenants, insurance, etc to say nothing of what happens if the business fails or needs to expand. Best to keep the two separate and from what I learned in my own experiences, at least a 30 minute commute apart physically.

Duly noted, thank you.

Most our family problems now stem from me being gone too much (60-80 hour weeks), and my wife needing help with home schooling. This situation would give us more flexibility as a family and fewer working hours for me. And, those work hours would be with family nearby. As the kids get older, they can take a larger part in the family business, and all the life skills that go along with that. Everybody's situation is different. I am not discounting your experience at all (thanks for sharing it!), but my wife and I feel very good about the potential change to our home/family life.

You lack sufficient equity/cash by half or more to do what you want and nobody is going to lend you enough to buy a property and live on based simply on your business plan. You would need enough to pay cash for the building and live off savings for an indefinite period of time until your business is actually established. You have enough equity to use for living expenses and that's about it, certainly not enough to purchase a property. Quit your job teaching, temporarily rent more space for your business and demonstrate the ability to earn adequate income for a year or two. Loans are based on income, not equity (just ask Sears which has lots of equity and little income.). Better yet, keep your job, rent a larger space for your wife's business and let her demonstrate the ability to generate income. You can do all the homeschooling as your part of the deal.

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Saint Cloud, Minnesota, where the weather is wonderful even when it isn't.

You can do this and substitute if cashflow gets tight. Have you considered cashing out your STRS to help finance your transition? It's an unfair system, and it's probably not going to pay out much by retirement age - you'd need to stay in for 35-40 years to make it really pay off.

Beware though, renters are vermin.

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bfd
You can do this and substitute if cashflow gets tight. Have you considered cashing out your STRS to help finance your transition? It's an unfair system, and it's probably not going to pay out much by retirement age - you'd need to stay in for 35-40 years to make it really pay off.

Beware though, renters are vermin.

I have 12 years in the retirement system now, after this year. If I continue teaching, I'll get full retirement in 16 more. I'd like to keep what's in there now. I currently also teach at the local community college. If more opportunities opened up there, I could potentially work enough to get credit years towards my retirement. Or, I could go back to teaching full time and pick up where I left off. If I cash out, that's all gone, and my cash out amount is only $60k right now. Better to leave it there.

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Speedy
You lack sufficient equity/cash by half or more to do what you want and nobody is going to lend you enough to buy a property and live on based simply on your business plan. You would need enough to pay cash for the building and live off savings for an indefinite period of time until your business is actually established. You have enough equity to use for living expenses and that's about it, certainly not enough to purchase a property. Quit your job teaching, temporarily rent more space for your business and demonstrate the ability to earn adequate income for a year or two. Loans are based on income, not equity (just ask Sears which has lots of equity and little income.). Better yet, keep your job, rent a larger space for your wife's business and let her demonstrate the ability to generate income. You can do all the homeschooling as your part of the deal.

We could ramp up pretty quickly. We have way more inventory right now than what my wife is able to list. Over the summer, between when I'm done teaching and my paychecks stop, we should be ok for ramp-up. eBay business is already well established. Just a matter of scale...basically, my time. She's continuing to put more and more time towards eBay now, looking forward to a change, but we can't do much more until I jump in. She's netting about $2k/mo right now. With what she's been doing lately, it should be getting closer to $3k pretty soon.

Edit: I know this might not be the right way to do it, but if we apply for financing now, my current income would be taken into account (pushing $90k this year). If we weren't able to ramp up fast enough, I could continue for one more year (ugh) or sub. I also plan on teaching private music lessons in the space too too (no space for that now). That will help. Anything that goes into the pot.



Edited 1 time(s). Last edit at 11/12/2017 03:12PM by BernDog.

Congratulations, it is very smart what you want to accomplish.

First, setting up an LLC for the real estate, separate from your business is the right idea.
Second, as you go shopping for commercial mortgage do set up 3 to 5 packages and shop separate financial entities, couple banks, credit outfits (Merril Lynch and GM used to be examples of these, probably not now). Then you can pick and choose the better offers, or combine their best features into one deal.

However having your own household in the building might be a bit of sticky deal, depending on the way it might fit into a commercial mortgage, check it out first, you might just structure as a simple rental, without you as a private person being a specific tenant.
Better yet, set it up as your own business being the tenant, It is a lot easier to get financing on business owner occupying part of the building. As owner occupied property, you probably will need to come up with a down payment of 10% to 20%....

Has your wife considered looking into taking on an intern to help her with the eBay business?

[quote
Edit: I know this might not be the right way to do it, but if we apply for financing now, my current income would be taken into account (pushing $90k this year). If we weren't able to ramp up fast enough, I could continue for one more year (ugh) or sub. I also plan on teaching private music lessons in the space too too (no space for that now). That will help. Anything that goes into the pot.][/quote]

The banks have fine print in loans like this for just that reason . A local couple of teachers applied for a loan to build house based on both incomes . She quit working and the bank stopped loaning money . They just don't give out a lump some of money.

I stopped reading and lost all interest when Ombligo said this:

"My wife has 23 years in her pension, if she retires today - it pays $700/month for her life. If she stays seven more years, that monthly goes to $2500. That is a difference of more than $400,000 over 20 years."

Wow! Yes, Mrs. Omb, stay 7 more years!

Ok Bern, I'll jump in and say do it. Or at least try to do it. Ethyl and I have worked together for over 40 years, and you can separate work and life, even in same building. I flatly disagree with that "at least 30 minute commute" mess too. Whew, no way. Work from home is great. And business rental tenants are a good thing to have. I know a young couple who did almost exactly what you're wanting to do in a commercial building. Tenants are paying the mortgage. Bet the farm and don't look back.

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Now I wouldn't want to be within 400 - 500 yards of one of them nuclear bombs when it goes off! WW1 Vet Old Man
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Edited 1 time(s). Last edit at 11/12/2017 05:35PM by GuyGene.

Consult [bogleheads.org]

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Also consider consulting with a SCORE mentor. It's free and they usually give good advice.

Those prices are cheap. Here in NJ you would be be looking at 5-10x as much. seriously.