So, You Want To Buy A Horse Farm! Part 2 (Finances)

...a business plan, and making your dream actually happen.

What To Know About Loans
When starting a business, you need to educate yourself about the types of available loans before you start looking for real estate. You may qualify for a $500,000 residential mortgage, but that doesn't mean you'll qualify for a commercial loan of the same amount. Commercial lenders insist on much larger down payments — typically 30% or more of the appraised value — not of the asking price. They also want to see that you have enough money left over in your bank account after the down payment to cover several months of payments. They rightly assume you won't be able to generate sufficient cash flow from operations in your first several months of business. And unlike residential mortgages, the term of a commercial note will never be more than 20 years. That will significantly increase your monthly payment for the amount of money you want to borrow compared to a 30 year residential mortgage.

In addition, commercial lenders will want to assess your net worth. This assessment will include all retirement funds, vehicles you own, other property, such as your horse trailer and horses minus all your debts. You may suddenly find that loans on your engagement ring, vehicles, or a piece of art could be affecting your "commercial" credit worthiness. Your past experience running such a business could also be questioned. Writing a credible business plan will help to show that you understand the details, are organized, and have the ability to manage the business and its finances.

Commercial loans employ variable interest rates. You need to know if you can afford not only the current payment, but an increase in that payment over the next couple of years if rates were to go up. Lastly, you may own a home already and have your property taxes and insurance in an escrow account attached to your mortgage. Commercial lenders do not escrow money for taxes and insurance on your behalf as part of servicing your loan. YOU will be responsible for budgeting to put aside cash for taxes, insurance premiums, and any other property-related costs as they become due.

Of course, you can get creative if you're looking at buying non-residential property. There are private investors that may consider investing in your business. The Small Business Administration (SBA) offers special loans to first time borrowers. Programs are also available in both the public and private sector to women and minority owned businesses as well. Utilize resources at your alma mater or local university for more information and networking. You may even find family members willing to invest in you — you won't know until you ask. No matter what avenue you pursue, be sure to fully understand all of the terms of any agreement required so you know your purchasing power when you start looking at properties.

Making it Pay
Once you know and understand what you're buying and its real cost both in personal cash, borrowed monies, or funds invested by others, you need to consider whether the property you're hoping to buy can pay for itself. To make this determination, you'll need to do a preliminary cash flow and break-even analysis. We covered this analysis in part 1, but this time, we're going further and into more detail.

Start by listing the expenses you know you'll have on a monthly basis, such as insurance, taxes, electricity, water, loan payments, and other costs. For any annual or quarterly payments, convert them to monthly payments. For example, an annual insurance premium of $3,600 represents a monthly cost of $300 per month. Then figure out your cost of goods sold (COGS). For a horse farm, this is generally your hay, grain, and shaving's costs per horse on a monthly basis. If you intend to hire teenagers to muck stalls, their wages must also be included.