questions- home/business/loan/mortgage?!?

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gregovertone
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questions- home/business/loan/mortgage?!?

Post by gregovertone » Wed Nov 26, 2008 10:54 am

a few weeks back--
there were some posts regarding lumping a small business loan in with a mortgage......

i have been searching for a good 20 minutes....i give up.

sooo, i'll try this.


i teach music/guitar out of my house for a living.

i have slowly been getting into studio stuff, and have been assembling a rig to record my student's bands.


after the new year....i will be purchasing my own home....and intend on setting up the basement as a studio.


i meant to pdf the thread with advice on home/business loans.....but i dropped the ball there.



what recommendations do you have for tying in business related home construction with a mortgage, etc?


thanks in advance!

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Post by CurtZHP » Wed Nov 26, 2008 11:14 am

I wouldn't. You'd just be loading yourself with more debt.

Save your money and build as you go. Avoid borrowing or buying on credit if you can.

What I did was set up my gear (which I already owned) in an area of the basement, so I could at least function. The money I earned from production jobs paid for building materials for the studio I built at the other end of the basement. When the room was finished, I moved the gear in. It didn't take as long as I thought it would, and when it was done, it was paid for in full. I was happy, and more importantly The Missus was happy (something about still being able to make the mortgage payments and buy groceries or something like that!).
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Post by casey campbell » Wed Nov 26, 2008 12:59 pm

CurtZHP wrote:I wouldn't. You'd just be loading yourself with more debt.

Save your money and build as you go. Avoid borrowing or buying on credit if you can.

What I did was set up my gear (which I already owned) in an area of the basement, so I could at least function. The money I earned from production jobs paid for building materials for the studio I built at the other end of the basement. When the room was finished, I moved the gear in. It didn't take as long as I thought it would, and when it was done, it was paid for in full. I was happy, and more importantly The Missus was happy (something about still being able to make the mortgage payments and buy groceries or something like that!).
dude, great advice. it's great to own the gear and it not own you. dont get into any new debt. pay for everything as you go, it takes longer, but you will be stress free. i did it this way, and i own all of my gear, and dont owe for any of it....

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Post by gregovertone » Wed Nov 26, 2008 1:48 pm

thanks for the replies!

the loan would be for home improvements, such as building rooms in the basement to be used for teaching/recording.

i wouldn't take out loans for gear.


the specific post i was reading had something along those lines.

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Post by Gentleman Jim » Wed Nov 26, 2008 2:11 pm

A few random thoughts here:

Zoning. I know that for most of us the idea of the local code enforcement doesn't really apply, but you're talking about running two businesses that have some level of public accommodation from your basement. In some areas this can really be a problem. Do you know the neighbors you will have? What will the parking situation be in the new neighborhood?

Talk to your accountant, (you do have an accountant, right?), about the tax implications of using a portion of your home as business space. You may be entitled to some tax benefits which may help offset building costs.

Are you and your family prepared to share home and business space? I recently left my 9-5 of 10 years and I'm working from home for the near future. I have two kids, aged 8 and 6, and when I have voice over work to do on short notice during the day I have to get them out of the house. Not ideal to say the least, but such are the hassles of starting a new business from scratch when you have a family and existing expenses. I hope and expect things to get better to the point where I can get some other space, but I can't say when that's going to happen. Think about your students/clients walking through your home to get to the basement. It's not for everybody.

As far as the mortgage thing, I come down somewhere more liberally than the other people who replied. As long as you seriously watch your expenses I don't think using mortgage money for construction is the worst idea in the world. The question I have is will that mortgage money be there after the beginning of the year? There have been times in the past when mortgage money simply wasn't widely available to average people. Like around 1979-1982 there were definitely sporadic problems. Be mentally prepared for that possibility, who knows what's going to happen in 4 months?

Good luck.

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Post by CurtZHP » Thu Nov 27, 2008 8:20 pm

Construction of a couple rooms in an unfinished basement doesn't really cost that much. You're basically talking lumber, drywall, and electric. Oh, and paint and trim. If you're doing all the work yourself (like I did), the materials are relatively cheap. It's probably more aggravation than it's worth to try to tie this into your mortgage.

Another wrinkle, but by no means an insurmountable one....
Insurance. You can actually attach a rider to your regular homeowner's policy to cover your gear. (I did, and it was way cheap.) The problem is liability insurance (i.e. covering you if you get sued by some klutz who falls down the cellar stairs on the way to his guitar lesson.) That can be ridiculously expensive, and some insurance companies won't even write you a homeowner's policy if they know you'll have a steady stream of clients coming in.
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Post by gregovertone » Thu Nov 27, 2008 8:29 pm

thanks for the reply.


i was considering just paying out of pocket----but i was planning on throwin as much cash as possible to the down payment/closing costs, etc.


i do have solid insurance now, as i run about 80 students a week teaching now.

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Post by kayagum » Fri Nov 28, 2008 7:42 am

gregovertone wrote:but i was planning on throwin as much cash as possible to the down payment/closing costs, etc.
Smart thinking- you will need it... in the current credit crunch, you will need at minimum 10%, probably 20% down.

Advice for everyone: if you need to buy something on credit, and you find someone who is willing to lend, DO IT NOW. 2009 will be (at best) an uncertain year.... nobody knows what the credit climate will be like. If it goes back to lending standards circa 1975, you young ones are in for a rude awakening. You will need a boatload of cash just for the down payments.

Paying with cash has ALWAYS been smart, but this is now even more important than ever.

If you have unsecured debt, it's even more crucial you pay that down now, before your creditors change the terms on you (they legally can change just about anything, and your only recourse is to say no within 15 days and pay off your current balance).

Actually, one approach that seems to be prudent is to save your cash in an FDIC insured account, and pay off your unsecured balances in lump sums. Understand that if you pay off your lines, the creditors may respond by cutting your available line limits.... don't pay them off until you have a corresponding cushion in cash.

(I work in the "industry" for my day job)
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Post by CurtZHP » Fri Nov 28, 2008 7:43 am

I'd stick with the plan to throw as much into a down payment as possible. Your monthly payment will be lower, and if you already have a steady client base, you'll be building in no time. Take it in stages. I spent nearly a month just measuring the space and plotting where things would go. (You're only going to get one shot at this.)
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Post by Jay Reynolds » Fri Nov 28, 2008 8:02 pm

+1 what kayagum said.
But, here's some more stuff to think about:

Commercial money is very hard to come by right now. Yes, if you can find someone willing to lend you money based on your teaching book, do it. But realize that the terms are not going to be 30-year fixed. And they may secure the note against your personal assets.

You cannot take money out of a property you are buying with a residential mortgage. And you'll have to be on title for at least 6 months before getting a cash-out refi. And even then its not a great idea. Cash-out always carries a higher rate and you'll incur a second set of closing costs. So, some of that money that you put down at purchase time is going to get burned up when pull the cash back out 6 months after closing.

The next problem with the cash-out for a studio build is that finnishing your basement isn't necessarily going to add value to an appraisal. In fact, basements are the worst place to do improvements. You're better off putting that money into the kitchen or a bathroom.

So, barring a commercial lender who just loves your 2008 P&L statement, I'm against the mortgage for the studio. There's enough good info on the TOMB that you shouldn't have trouble bootstrapping yourself into a good setup on a cash basis.

Some other things to think about before buying a house (sorry, but this is totally non-audio related):

If you don't have at least 20% to put down and you credit isn't perfect, look at an FHA loan. The rates are as good or better than conforming/conventional and the Mortgage Insurance is less expensive (you won't have to worry about MI if you put down 20%).

Just because Fannie/Freddie/HUD approves it doesn't mean you should close it. You can get a loan that will push you debt-to-income ratio above 50%. This is not good. 45% really isn't good.

Your loan officer shouldn't just ask the questions that are on the 1003 Loan Application. They should ask about your personal/financial plans in general. Are you starting a family? Are you going back to school? Are you saving for retirement? Are you saving for you kids' education? What discretionary spending should he/she be budgeting for? None of this info is on the 1003. And it is very important. Your loan officer should behave more like a financial planner than a sales person. If you are not sure of the difference is, talk to a CFA before you do anything else. Your accountant should be able to recommend one.

Unless you are a licensed loan officer with a decent amount of experience, you should only look at a 30-year fixed. If you aren't an LO, no ARMs, no interest only, no pay option loans. 30. Year. Fixed.

Rates are really good right now. As of Friday, you should be seeing rates around 5.5%. Unfortunately, this number will change when the bond market opens on Monday.

Oh, yeah. Mortgage rates are set on the bond market. A good way to figure out if your LO knows what they are doing is to ask them how interest rates are set. If they don't say "the mortgage-backed security" or "the bond market", run away, very fast.

I'm stuck posting this on my wife's new phone because my phone won't post to the TOMB and I'm away until Monday. Sorry if any of this isn't clear. I'll try to keep up.
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Post by Dave Stanley » Thu Dec 04, 2008 11:45 pm

Hey Super-action, what do you do for a living? :)
That's some specialized advice your giving there! Good stuff!

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Post by Jay Reynolds » Fri Dec 05, 2008 6:50 am

I'm a finder of lost loves :wink:
Two more things came to mind looking at this thread again:

You could try to get a "subject-to" loan. These loans allow you to borrow against the property's value "subject-to" completion. Problem is, there's still no place on an appraisal report for improvements relating to a basement studio. So it would be pretty hard to get one of these. And you'd likely have to have a licensed contractor do the work.

There is a $7,500 tax credit that is available to home buyers until April 09. Its repayable as a zero-interest loan over fifteen years starting 2011. That mean you'd be coughing an extra $600 come tax-time until its paid back. This may not be the worst way to go, provided you could comfortably set aside the extra $50 a month.
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Post by 8th_note » Sun Dec 07, 2008 1:49 pm

The next problem with the cash-out for a studio build is that finnishing your basement isn't necessarily going to add value to an appraisal. In fact, basements are the worst place to do improvements. You're better off putting that money into the kitchen or a bathroom.
Good input from superaction but this point I would take issue with.

If you buy a house with an unfinished basement, and each room has egress (a window you could crawl out of in case of a fire), finishing the basement may be a very good investment. In most cases unfinished basements aren't calculated as part of the living area. So, for example, you may buy a house that is classified as having 1800 square feet of living space with an additional 800 square feet of unfinished basement. If you finish the basement, and it qualifies as living space, you have just increased the livable square footage of your home to 2600 square feet. I can sure as hell tell you that the county tax assessor will increase your assessment if you pull a permit for the construction. When the house goes on sale again it will be appraised as a 2600 square foot house with a corrspondingly higher value.

I suppose this may vary by area but where I live (Portland/Vancouver) the above is the case. Buying a house with an unfinished basement and doing the work yourself to finish it can be an excellent investment. In fact, as a real estate play, if you're handy, the best thing you can do is buy a fixer upper in an older neighborhood that is gentrifying. If you can do the update work (kitchen, bathroom, basement etc) in the house and stay there for 10 or 15 years you can see some above average appreciation.

This is a little off topic but if you live in an urban area there's a great website that can assist you in house hunting: http://www.zillow.com/. It has the values and descriptions for every house so you can learn more about the neighborhoods you are considering.

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Post by Jay Reynolds » Sun Dec 07, 2008 1:57 pm

Totally right. I should have said "The next problem with the cash-out for a studio build is that putting a studio in your basement isn't necessarily going to add value to an appraisal."
Also, zillow.com is kind of a mess right now. Take the numbers you see on it with a fist-sized grain of salt.
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Post by 8th_note » Sun Dec 07, 2008 2:29 pm

Also, zillow.com is kind of a mess right now. Take the numbers you see on it with a fist-sized grain of salt.
Yeah, I should have noted that the numbers are not accurate. In fact, in a perverted way Zillow does reflect the state of the real estate market in general. The Zillow value of our house dropped 18% in one whack. Nobody knows what a house is actually worth right now because the market is in a state of suspended animation while buyers wait for the bottom.

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