After being denied a loan by five banks, and seeing his original location get washed up by the torrential economy, it's a wonder that Raphael Alvarez didn't give up on his dream of opening a salon.

His place in San Diego, called Cut, was slated to open in Mission Hills in February. It took two years of planning -- spending time and money negotiating the lease, paying attorneys, getting permits, buying equipment and getting engineering work done.

Then his lawyer called with bad news: The bank had swooped in and taken the property. The money he had spent was gone.

End of story? Hardly.

The 42-year-old hair veteran miraculously found another location in Bankers Hill. Seven weeks later, the salon was up and running.

The Upside of Downsizing

That was three months ago. Looking back, Alvarez says that the down economy was actually a blessing for his business.

"In this economy, it's not as good to open such a big salon," said Alvarez, who was raised in Mexico and has been in the hair business for the past 20 years. "It works where we are now. It's more manageable."

He says the new location is superior to the original space he planned to set up shop. It enjoys more parking, better accessibility, and second-story views. At 2,500 square feet, it's half the size of the Mission Hills space, so Alvarez pays far less rent.

Still, even after Alvarez secured the new location, more obstacles kept threatening his business.

Family Sacrifices and Help from Friends

Two weeks before opening, with more construction to complete, he went to the bank after all checks were cashed that week for equipment, and found he only had $19 left in the account. "I sat in the corner of the salon and cried," he said. Luckily, one phone call to his mother resulted in the last few dollars he needed to get through opening day.

Alvarez and his wife opened the salon with the bare minimum; there was initially no place for clients to sit, and no computer or laundry. To save money, they had to take their 6-year-old girl and 9-year-old boy out of sports, and family vacations were out of the question. "There were no trips to Europe, no trips to Disneyland," he sighed.

The clients he's cut and groomed over his career also aided in the salon's opening. "I had to go to available resources, which are my clients," said Alvarez, who tapped 10 clients -- including a real estate agent, attorney, graphics designer and professor -- to help him find and negotiate a lease, write a business plan, figure out how to find funding and design a logo.

"We couldn't get a loan from a bank, so everything was put on credit cards and a small personal loan from my brother. That went quickly," said Alvarez, who tried to get $100,000 from a bank to have some working capital left over to work with.

The main criticism from the five banks that rejected the couple was the Alvarezes' lack of experience, even though they have owned a home for the past 11 years and tried taking money out of it. Tapping into their retirement funds wasn't an option, because they didn't have any.

"We opened the salon with zero working capital and no money in the bank," he said, adding that he aims to have all credit card debt paid off in a year.

The couple has dumped about $50,000 into the salon to date, and they have saved some money by designing the space themselves, completing a lot of the tenant improvements like painting, and holding back on any advertising.

During their summer break, as the couple worked 10-to-12-hour days to get the salon ready to open, they set up a "Camp Cut" for their kids with a room full of video games, books and Legos. His kids would also lend a small hand by cleaning, painting, and sweeping the salon.



Wooing the Right Help

Alvarez knew that the primary people he needed to woo were the hairdressers, who rent booths on a per-week basis and bring in their own clients through the salon doors.

Permalink | Email this | Comments

The decision to buy a home is complicated, but answering these five questions can bring some clarity to this big-ticket decision.

1. Would it be cheaper to rent? If you're thinking of scooping up a condo these days, your best bet is taking a gamble on Sin City. Buying is a cheaper choice than renting in nearly three-fourths of the biggest U.S. cities, with foreclosure-flooded Las Vegas being the best place to do so, followed by Detroit; Mesa, Ariz.; Fresno, Calif.; and Arlington, Texas.

San Francisco-based online real estate firm Trulia compared the price of buying and renting in the 50 most populated U.S. cities. Price-to-rent ratios were calculated using the median list price compared with the median rent on two-bedroom apartments, condominiums, and townhomes listed on Trulia.com as of July 1. Don't think about taking out a mortgage in New York; Fort Worth, Texas; Omaha, Neb.; Seattle; San Francisco; and Kansas City, Mo., the survey suggests, where inking a lease is the more frugal option. Here's a rundown of cities where it makes the most sense to rent and where it's worthwhile to purchase a home.

2. How long do you plan to live there? If you can purchase for the same or less as renting, it makes sense to buy as long as you don't plan on relocating in the next few years, according to Craig Strent, CEO of Rockville-based Apex Home Loans Inc. Unless you plan to stay in the home for at least a few years, recouping your closing costs may not make buying worthwhile.

"For these particular buyers, I would tell them to not make the same mistakes as past homebuyers who were caught up in the housing frenzy," he said. "Buy when they are ready, not because it may be a good time to do so."

3. Is your credit good enough to qualify for a good rate on a mortgage? Thirty-year fixed-rate mortgages are at a record low 4.15%, according to Freddie Mac, making it a great time to buy for those who qualify. But that pool is small, thanks to picky banks and fewer people who can afford loans.

Lenders have started to rein in their reckless lending habits of recent years, so you must have a strong credit score to get the best interest rates. It might be worth putting off a purchase for a year while you improve your score. (Remember that the Fed has vowed to keep rates low for quite a while, so much steeper rates are not around the corner.)

4. How much money can you afford to put down? Try to put at least 5% down and avoid more expensive Federal Housing Administration loans, says Strent. Ideally, he continued, buyers should put 20% down.

5. Will the purchase leave you strapped for cash? "Price alone should never be the sole factor in deciding to purchase a home," said Ken Shuman, head of communications at Trulia. Instead, he suggests, buyers should first ask themselves whether they plan to live in the home for at least seven to 10 years, could make monthly payments on the house, and have enough cash in the bank for a down payment and an additional six to eight months' worth of mortgage payments.

Motley Fool contributor Tierney Plumb holds no positions in any of the stocks mentioned.

Permalink | Email this | Comments