Why Tenant Screening Reports are Important

Investing in real estate can be a profitable way to increase your wealth in two ways. The first is simply the gain on the property when you sell it. The second is that if the property is leased it can generate an ongoing stream of revenue. In some cases that revenue stream can be enough to pay the mortgage on the property every month.

Most commercial properties depend on rental revenue as a primary factor in their income projections. The value of the property includes the discounted value of the rental revenue in the calculation, as well as the value of the building itself and land.

Residential property, especially single family homes, usually sell on a square footage basis and don't consider any leasing income in the determination of value.

Tenant Screening is a critical aspect of successfully managing a portfolio of residential rental properties. The wrong tenant can not only result in lost revenues but property damage as well.

Different states (and countries for that matter) have different rules, regulations, and laws which determine when and how a tenant can be evicted. The process can take up to a year. Not only do you lose the incoming cash flow from the rental payments, you have the additional expenses of paying an attorney to handle the eviction. A pre-leasing investigation known as a tenant report can help you avoid this situation.

While it's important to real estate investment companies to make sure that their tenants are financially stable, it's critical for individual investors. The loss of rental income from just one property can be devastating to an individual. The property can't be leased again until the current tenant is evicted for nonpayment.

Most investment companies have a number of properties and can absorb a loss on an occasional basis. Individuals who invest in residential properties that they intend to lease must complete the required due diligence to assure themselves that the tenant is credit worthy, ethical, and doesn't have a history of property damage, a criminal record, or prior evictions. A rental application is just the first step in this process. Tenant reports verify that the potential tenant is who they say they are by checking social security numbers, driver's license, prior addresses, and of course that they have the financial wherewithal to make the rental payments.

Tenant credit reports verify any bankruptcies, short pays, loans and credit accounts, all important factors which should be taken into consideration when signing a rental or lease agreement. A tenant who has not historically been financially responsible in the past has a much higher probability of being irresponsible in the future. In other words if there have been problems in the past with making the rental payments on time and in full, those problems will most likely continue in the future.

While in most cases the landlord won't be held liable for any criminal activities that take place on their premises, their insurance will most likely increase.

If you're considering investing in residential real estate and leasing the properties, there are services which will compile a tenant report for you. It's money well spent.

Loans for Business Start Ups

Starting a business is pressure enough. Trying to find loans for business start ups is doubly difficult. Your local Small Business Development Center can help. The Small Business Development Centers are funded by the Small Business Administration and the local community colleges. Their counselors can provide you with direction on what types of loans are available for small businesses in your area.

Many cities have offices to help business start ups, as do many chambers of commerce. The cities themselves sometimes offer localized loan programs. These programs are to encourage businesses in disadvantaged areas of the city. Some of the city loan programs are tied to increasing employment in the area.

Another option is to contact your local SCORE (Service Core of Retired Executives) office, many of the SCORE participating executive come from the banking industry. They’ll know which bank is actively recruiting small business loan applicants and which banks aren't.

One word (okay more than one) about loans from the government. The US Federal government has an office called the Small Business Administration. The SBA does not make loans for business start ups directly but guarantees the loan to the financial institution who actually makes the loan. There are no grants through the SBA. Contact your bank to see if they participate in the SBA loan programs.

Don't overlook a credit card as a way to get a loan for a business start up. Many cards offer low rates for the first six months. If your personal credit rating is good you should be able to get a card (or two) to get your business going.

You might reconsider whether you actually need a loan for your business start up or whether there might be other ways to finance your business. You might consider trade and barter, getting merchandise on consignment, leasing equipment including office furniture, or obtaining 90 day payment terms for inventory you purchase.

Marketing Strategies

Image

When customers think of your company and its products/services what will come to mind? Will your image emphasize high quality and exclusiveness, or perhaps friendly, and value oriented. Fast response, high tech, or customer service oriented? Young and on the edge or traditional and well established? The image you define for your company is then carried through in your marketing materials.

Distribution or how will you get your product to market? What channels of distribution will you use? Will you sell directly to the end user or wholesale the product? Will you use outside sales representatives or an in-house sales force? Commissioned or non-commissioned? Will you license the product and have someone else market the product for you? If a website will you develop an affiliate program, partnerships and links with other websites?

Promotion or how will you tell your customers your product is available? Word of mouth? Referrals? Advertising through print, TV, newspaper, radio, direct mail, websites, brochures, coupon, or co-op? Trade shows? How will you use publicity?

Search Engine Optimization (SEO) are the methods used to increase the ranking of a site in the search engines so it shows up high. That's important because people searching for a subject usually will choose one of the sites on the first page to visit, usually one of the first 3 or 4 sites listed. The higher a site rates the more traffic will be generated from the search engines. SEO Consultants use a number of techniques such as meta tags, directory submissions, and backlinks.

Website Design is important to every business whether they have a physical presence or are strictly an Internet based business. A poorly designed site can lose sales and chase visitors away. A site that uses too many flashy bells and whistles can come off as unprofessional. Web Site Designers use many tools to develop a site that represents your business.

Marketing Objectives

Marketing strategy matters and its importance can't be overstated. Entrepreneurs have a tendency to fall in love with their product/service and just assume that everyone else will feel that same attraction. Too often all the company funds have been expended by the time the product is ready for market under the logic that very little marketing will be required once customers realize the product is available.

"Build it and they will come" works in the movies not in the business world. Search Engine Optimization, keyword strategies, website design and much more are part of marketing your company and product on the Internet.

Entrepreneurs often talk more about how much of the product they intend to sell rather than how they are going to sell it.

The Marketing Strategies consists of:

Marketing Objectives
Image Definition
Distribution
Promotion

Marketing Objectives

This is the nitty gritty of the marketing. The objectives should be expressed as either units sold, or revenues achieved, within a time period. Justify the objectives based on the size of the market, market trend, target market, and your marketing strategies.

More on Angels

It has often been stated that angels do not have as much expertise with negotiations, especially with establishing a value for the company’s equity, as venture capital firms might. They may not have standard contracts or terms to present to the entrepreneur. It is important that the entrepreneur has an experienced attorney to consult with during the negotiation process.

Angels are remarkable in that they invest in companies at the riskiest stage of all, before the company has reached enough milestones to be able to say with confidence it will survive, let alone become a thriving, valuable business. Experienced angels know that they will likely not make money with the majority of businesses they invest in. But finding a “winner” can mean extraordinarily high returns on their invested capital, along with the satisfaction of watching a company they assisted grow and become a force in the marketplace.

Angels want both types of “returns”: financial plus a feeling of making a positive contribution. Entrepreneurs who wish to entice angels into investing must make sure they appeal to both these needs.

It is a mistake to not view angels as professional investors. They did not become millionaires by making naïve investment decisions. Entrepreneurs approaching angels need to be as thoroughly prepared as they would when approaching “professional” venture capital firms.

Another mistake is believing that there is an angel investor for every conceivable business idea. A business that will never be able to do more than provide a good living for the owners is not a suitable candidate for angel investment. They seek companies that have a good chance of growing rapidly, gaining significant market share, and have barriers to competitive entry—pretty much the same thing venture capitalists look for.

Angels do not want to invest in a yogurt shop in the strip mall. Now if you came up with a new formula for yogurt that could be franchised, it might be a different story.

Angel/Private Investors

When an entrepreneur says, “I need to go out and get venture capital,” what does that really mean? In one sense, ‘venture capital’ could be defined as any type of financing for an early stage company. But entrepreneurs who believe that they need to go out and contact Venture Capital Firms for their capital needs, can be starting down a long and frustrating path. Many of these firms are not terribly interested in seed stage or pure start-up companies, preferring to jump on board when the company has achieved a certain number of milestones in product development and securing customers for the product. And no amount of persuasion by the entrepreneur can get the Venture Capital Firm’s partners to deviate from their investment focus.

So who does assist the usually cash strapped start-up entrepreneur?

The financial life cycle of a company often looks like this:

Stage Need for Capital Amount Needed Likely Source

Seed Organizing company $ 50,000 Friends, family, yourself

Start-up Product development, launch $500,000 Angel investors

First stage Market penetration $2 million Angels & Venture Capital Firms

Second stage Expansion $10 million+ Venture Capital Firms

Wealthy individuals, often termed angel investors, are by far the most important source of equity capital for early-stage companies. Typically, these individuals have been successful entrepreneurs themselves, and as such have a keen understanding of the trials and tribulations of building a company. In the ideal situation, an angel investor, or a group of angels, can provide much more than financing for an entrepreneur: the angels can often bring organizational, technical, marketing, and financial expertise. And of critical importance, the angels often have valuable contacts with potential customers, vendors, and even sources of capital for the next stage in the company’s development.

Angels vary widely in their investment experience and their approach to working with companies they invest in. Some invest only in companies related to there area of expertise; in other words, an angel who built and sold an enterprise software company would look for other enterprise software companies. In general, however, angels are willing to consider investments in a broad range of companies: high-tech, traditional or “old economy” companies, distribution, manufacturing, service.

From the entrepreneur’s standpoint, there are two major difficulties with obtaining angel financing: how to find the angels in their local community, and how to handle the negotiations. Finding them is difficult because, in the past angel, investing has been done on an extremely informal basis.

The entrepreneur’s company was referred to the angel through a mutual friend or business acquaintance. And angels do not seek publicity for their investment activities, for fear they will be overwhelmed with entrepreneurs seeking capital. There are no reliable directories of individual angels as there are for venture capital firms. For the entrepreneur, this means that the best way to find angel investing is through diligent networking in their local business community, attending events and letting people know that the company is seeking financing. Contacting angel networks, and participating in angel online matching services, both described below, are additional ways to meet angel investors.

How Much Capital Do You Need?

As much as I can get! This would be the answer readily shouted out by most entrepreneurs. The fact is though, both over and underestimating the amount of capital needed to fund a business can have serious negative consequences.

Underestimating what you need can cause problems ranging from having to go through the whole time consuming fund raising process again, to having to shut down the company because funds have run dry. Having to go back to the original investors and ask for more money often undermines the entrepreneur's credibility with the investors and can cause a significant dilution in the founder's ownership.

Obtaining more than enough capital may seem like a blessing at first, but it can breed a lax attitude toward expense control. "If you have it, spend it," is not an advisable motto for a new company. If the investment takes the form of equity, raising too much money means that the founder's share of the business was reduced more than was necessary--and this violates one of the maxims of entrepreneurship: hold on to those equity points!

Typical advice given to entrepreneurs is to do a cash flow projection, or cash budget, and then add 10%, 20% or even 50% to this amount, for "contingencies." These contingencies are all the things that can go wrong in a start-up venture, all the unfavorable events that can negatively affect results.

Contingency planning is a skill that does not come easily to all entrepreneurs--even those with a finance background. How do you get the cockeyed optimist (what you absolutely must be to even conceive of the idea of the starting a company), who expects the best, to plan for the worst?