Take Equity out of Rental Property to Fund Startup Consulting Business

[BiggerFishToFI]

Currently living and renting in Colorado. Own a property in another state that we are renting out. The mortgage balance is ~$121,000 @ 3.875%, 25 years left and Zillow has the Zestimate at $290,000 (I do not have an official appraisal yet). Rent is currently set at $1400 / mo but I am considering hiring a property management company to handle it and I think they could charge more ($1500-$1600/month).

We really like the neighborhood and would like to move back, renovate and live in the rental property sometime in the future 3-10 years out.

I am on a ~3 month plan to start my own consulting business here in Colorado. I am considering doing a cash out refinance to inject cash into the business and so I can pay myself a small wage, and have a decent buffer while I am out trying to drum up new business. I expect ~10-20k in startup costs, but plan to run the business very lean to start. These costs include a computer/instrumentation equipment (~2-3k), lawyer / accountant fees, incorporation fees, website/marketing and that is about it. My starting consulting rate will be ~$150/hr. I am covered through my wife's job on health insurance.

Would it be a sound idea to do a cash out refinance of 40-70k on the rental property (rate would go up to ~4.5%, plus origination fees etc.) to inject more startup capital into the business? It *might* be possible to start the business without this sort of injection (may or may not have a first client lined up, which wont really be known until I pull the trigger) but I would be much more comfortable with a small pile of cash that didn't decimate my existing savings / emergency fund.

Kind of thinking out loud here so any/all comments or recommendations would be appreciated!

[Bourbon]

I had written up a whole post on how that rental is a poor investment and you should liquidate it regardless of the consulting business.

Then I saw the line I skipped over that you plan to move back in.  I would still suggest that if you aren't wedded to that particular house you should consider selling it and just buying back in to the neighborhood when the time comes, especially if it is closer to the 10 year timeframe than the 3.

[SC93]

I agree with Bourbon on selling the rental. It's all great with it right now but things can quickly change for the worse.

That gives you play money to start your business. If you did that, I'd say set yourself a budget and go for it. Give it 6 months, if the new business isn't taking off don't continue to force feed it money. You have a good buffer so maybe try another business if you want or get a job. If you choose another business do the same thing, set a budget and see how it goes. If you chose to start a 2nd business and it failed also, you should still have a good sized buffer. Maybe if you choose to try a 3rd business make it something you can do cheap on a totally different subject than the first 2. Remember, those of us who have businesses have failed atleast a few times.

As for the consulting business. For you it seems the consulting is the easy part so no need to worry about that. Do you have a marketing plan? Most people think because they know how to do a certain thing all they have to do is come up with a name and say I AM OPEN FOR BUSINESS and people will flock in with business.... doesn't happen that way. Others think that they can pay someone to build a nice website and the calls will start rolling in..... nope, won't happen. The website failure can be for a few different reasons, probably not the business owners fault but because of bad web people. Without a great marketing plan that is better than any other consultant out there, I wouldn't go in to business.

[SeattleCPA]

I think you should be able to start a consulting business with basically no money. So I don't really like this idea. Sorry.

Consulting should be such a high margin operation that you can bootstrap your business from the get go.

Example: If you can't quit your current job, work the consulting thing as a part time or weekends deal until you have a book of business or a contract which means you can quite your current job.

P.S. I've been self-employed (CPA, consultant, writer, publisher, CPA) for decades ... also I provide CPA services to dozens and dozens of consultants... just for context.

[bwall]

I think you should be able to start a consulting business with basically no money. So I don't really like this idea. Sorry.

Consulting should be such a high margin operation that you can bootstrap your business from the get go.

Example: If you can't quit your current job, work the consulting thing as a part time or weekends deal until you have a book of business or a contract which means you can quite your current job.

+1

Give it 6 months, if the new business isn't taking off don't continue to force feed it money.

If the trade (in this case, the business) isn't going the way you expect, you have to take your losses and move on. Better to lose a little up front than a lot at the end. Sure, it sucks to admit that your judgement was wrong, but there's no other way.

[BiggerFishToFI]

Thanks for the responses. I am a professional engineer / programmer in a fairly niche market (yet at the same time it is very broad...)

My marketing plan is pretty weak but basically consists of creating a good looking website, reaching out to my professional network and going door-to-door (not residential) / to professional meetings etc. with business cards / maybe some flyers? Also I will likely go after some public works low bid-type work.  I have a 12-month non-compete with my current employer, after which I think it will be likely I will be able to convert several old clients. The industry overall is very word-of-mouth and I don't expect clients to come knocking.

Regarding the rental house... we really want to keep it, but will consider selling it. I think this whole idea will be doable without the refinance, I will just have to run lean / potentially forgo contributing to my Roth this year.... really don't want to do that but maybe I'll have some cash flow before April and won't have to!

I tend to obsess about these sorts of things when I get into them, last night I purchased the following books and plan to consume myself with this until I decide against it or go for it.... I have a couple months until my year end bonus after which I will pull the trigger or scrap the idea! If there's any other resources anybody recommends other than what is below I'm all ears!

The Irresistible Consultant's Guide to Winning Clients: 6 Steps to Unlimited Clients & Financial Freedom
Fields, David A.

Million Dollar Consulting: The Professional's Guide to Growing a Practice, Fifth Edition
Weiss, Alan

The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It
Gerber, Michael E.

Value-Based Fees: How to Charge - and Get - What You're Worth
Weiss, Alan

An Insider's Guide to Building a Successful Consulting Practice
Katcher, Bruce L.

[bwall]

I don't know which part of the country you live in, but no-compete clauses are not enforceable in California. Here is a bit of background as to why that is a good thing for the economy as a whole;

https://www.vox.com/new-money/2017/2/13/14580874/google-self-driving-noncompetes

I can't comment on the books you've chosen, but I do know that if you want to be successful you have to educate yourself as much as possible. Books are excellent (and cheap!) way to do this. Read as much as you can, from as many different viewpoints as you can so that you can make the best decisions possible.

[SC93]

So you are a professional at building a website and setting it up for SEO? Are you also a professional at SEO? You do realize when the website is being made you need to set it up at that time. You can't just make it look nice and think it is good. It needs to be correct from the backside and the front side so you need to know what to put on each page and where to put it. Personally I don't go for the cool looking site, I go for what I need to do to get it to the top of the first page. But that's just me.

If you just want a cool freaking website I can make you one in 15 minutes..... but that won't get you any customers.

[BiggerFishToFI]

So you are a professional at building a website and setting it up for SEO? Are you also a professional at SEO? You do realize when the website is being made you need to set it up at that time. You can't just make it look nice and think it is good. It needs to be correct from the backside and the front side so you need to know what to put on each page and where to put it. Personally I don't go for the cool looking site, I go for what I need to do to get it to the top of the first page. But that's just me.

If you just want a cool freaking website I can make you one in 15 minutes..... but that won't get you any customers.

Eh not a website expert at all, but I dont expect to get any clients from somebody googling my industry and finding my name at the top of the list. As I said it is a very word of mouth industry. The only people I expect to be visiting my website are ones who have heard about my company from other clients or through my professional network. I'm in an industry where having only 10-20 or less clients will have me buried in work for the foreseeable future