Tuesday, July 20, 2010

Residential vs. Commercial Mortgages for Opening an Arcade

Been awhile, but here is the next installment of my arcade venture. For this post I will be discussing what I have found out as far as mortgages go for residential property and commercial property. First thing to understand is that residential and commercial property mortgages are DIFFERENT and can not be switched/combined. For example, Some of the properties I've checked out were properties that have (or could have) a living space, such as an apartment attached. The one building was 2 floors, with the second floor having a separate entrance. The second floor also had a bathroom with a shower and all of the necessary hook ups (for a stove, sink, washer, dryer, etc.) for it to be an apartment. I tried applying for a residential mortgage with my basis being that I am buying the building to live in. this unfortunately can not be done. But wait, why would I want to get a residential mortgage instead of a commercial mortgage? First, residential mortgages generally have better percentage rates and are more lenient with the amount of time for paying off (ie. 15 years vs. 30 years). Residential mortgages also generally require less money for a downpayment, plus the closing costs (inspections, lawyer fees, bank fees, etc.) tend to be less. Banks and states also offer incentives to first time home buyers and a magical wonderful thing called the "Rural Development Mortgage." This is essentially a low percentage, no downpayment required mortgage for first time home buyers who are buying a home in a designated "rural" area. I know you might be thinking why open an arcade in a "rural" area? Well, what some states consider "rural" would surprise you. I live in a small city in New Hampshire and the properties I've been looking at qualify for a Rural Development Mortgage.

Overall, if possible, a residential mortgage would be the preffered method for buying property. However, lots of ideal in town buildings tend to be commercial properties. Here is some information on commercial mortgages. Generally speaking, commercial mortgages have a higher percentage rate. Commercial mortgages also tend to have a shorter pay off period. Some banks do not like going over a 15 year pay off period for the mortgage. This combined with the generally higher price that commercial property demands can be very daunting for a first time arcade operator. Banks also generally want nothing less then a 20% down payment. That is, 20% of how much the property costs paid up front. This alone can strike a pretty hefty nail into the coffin of owning commercial property. You can try to take out loans from banks, but then you will have multiple interest acruing to pay off. Two ways to help with the extra costs of a commercial morgage are:

1.) Seller/Owner financing: If the person selling the property owns it outright, you can bypass the banks and all of the extra bank fees by having the seller/owner hold onto the mortgage. You and the seller/owner can decide on a payoff time, a downpayment, and a percentage rate. Generally speaking, this way will offer you a much better percentage, and payoff time. You do have to be careful because in a situation like this, it gives the seller a little more leverage with his asking price. You can't expect to get all of this without giving a little. The giving will generally come with the offer for the property. Some sellers/owners will only do seller/owner financing if the buyer agrees to pay the asking price. After you and the seller come to an agreement, then you can (with a lawyer) create a contract and be on your merry way. This also happens to be a good way to bypass credit reports. Generally speaking, if you can come up with the down payment in cash, the seller/owner won't require a credit report/background check. you being able to come up with a decent amount of cash is usually enough reassurance for the seller/owner.

2.) Investors/Partners: This can work for both a commercial mortgage from a bank and seller/owner financing. If you are struggling with coming up with the downpayment for the property, then you try finding some people to invest in your project. Family can be key for this. Don't misunderstand me and think I am saying go milk your family for cash, but rather put together a convincing proposal/business plan and present it to them. This can also be done for friends as well. think about the classic "Everybody Loves Raymond" episode where Ray's friends are doing the proposal for they go kart track they want to open. In that episode they are trying to get people to invest in their business venture. You'd be surprised how many people WANT to get involved in a business, but either don't have the time or know how to go about it on their own.

Another possibility os finding a partner (or partners) to go in on the arcade business. This can be a double edge sword at times. Going about this method, make sure you know the people well you are going into business with. It would be good to go into an arcade business with either partners who have different strengths (maybe arcade repair, business management, etc.), or partners who have a similar vision as you (this cuts down on the possibility of fighting and arguing over the business direction).

Of course, any sort of partner/investor agreement should have everything documented in writing. It might be wise to get a lawyer to help you write up some contracts/forms/any for of documents that include ownership and how much is owned by who.

Sorry for the extremely technical post, but the more I get involved with starting an arcade business, the more hurdles and blocks I am discovering. Hopefully all of this information will be helpful to anyone who is thinking about, or starting an arcade business of sorts on their own. In the next post I will provide my personal thoughts on owning the property vs. renting the property, as well as an update on my own arcade business situation.

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