Financing for the Self Employed

23 Replies

For about 2 1/2 years, I have been Self-Employed. According to my tax return, last year I broke even. While my income has increased drastically this year, I will still have some deductions. 

I've been thinking about finding a multi unit and living in one of the units to qualify for first time home buyer/owner-occupied FHA financing.

What is everyone's experience with investing as Self-Employed?

Would it be worth my time to get a part time job? Then there's that saying, "work smarter, not harder". 

A few people have approached me about wholesaling and flipping to get some capital first. 

Any advice or experiences is greatly appreciated! 

Thank you.

Hi Stephanie- I've always been self employed, and yes, getting loans can be a PIA. Most lenders will look at two years tax returns and average them, so last year is going to haunt you for a while. It may just take some patience. If this year is good, you may be able to find a lender sometime next spring who will who will look at your 2014 return and part of 2015 (this part wouldn't be tax returns, just income statements). You'd almost certainly need to find a lender who keeps their loans in house (a portfolio lender) to get them to agree to lend to you. These are usually small local banks and credit unions. Or, you can just wait, but I know that's frustrating.

Getting started as a wholesaler could be a big job, I think the idea that you can simply wholesale a few houses to get some quick capital is really not practical. (of course, you may have mad marketing and networking skills and could easily prove me wrong...)

Flipping without capital or experience is also not practical.

Your idea of an owner occupied multi is great. Owner financing is another thing to consider.  An ideal situation would be if you could find a "tired landlord" who wanted to keep getting income (from your loan payments) but no longer be responsible for the property (that would be yours!) 

good luck!

Originally posted by @Jean Bolger:

Hi Stephanie- I've always been self employed, and yes, getting loans can be a PIA. Most lenders will look at two years tax returns and average them, so last year is going to haunt you for a while. It may just take some patience. If this year is good, you may be able to find a lender sometime next spring who will who will look at your 2014 return and part of 2015 (this part wouldn't be tax returns, just income statements). You'd almost certainly need to find a lender who keeps their loans in house (a portfolio lender) to get them to agree to lend to you. These are usually small local banks and credit unions. Or, you can just wait, but I know that's frustrating.

Getting started as a wholesaler could be a big job, ...

...good luck!

 Wow - this reply above is filled with wisdom

I was thinking the same type of strategy but I make barely above minimum wage. Is there anything that I could do differently? @Jean Bolger

Hi Zamiyun-

lenders love w-2 income, so that part is good, but it's going to be hard to qualify for much of a loan with a low income.  I saw in your profile that you're a recent college grad -Is your job in the field you want to work in and does it have the possibility of paying better in time? In that case, patience might be your best bet. If not, then you could start looking into something that might get more money coming in. 

The owner finance scenario described above might work for you, too. The trick would be finding a seller- if things are selling really quickly in your area there's not usually a lot incentive for a seller to owner finance, they usually want to get a chunk of cash to invest in something else. But here's an exception to that: if you could find a landlord who owned a property outright and was ready to retire you might have something. If that landlord just sold his property in a regular sale he would owe all of his capital gains taxes in one chunk. Sometimes it's better for tax purposes to take the money in smaller increments, so you only pay a bit of that tax at a time. Whether this is worth it or not to the seller depends on the their entire financial situation, not just that particular property. And you can't really know that, but if you get educated a bit about how that works you would at least be able to bring it up with a seller. They could run it by their accountant and see if it was a good idea for them.

I don't want to hijack your thread @Stephanie Hay  , but that additional info on reasons why a seller might want to owner finance might be helpful to you too

I'm no expert on this by any means. But do a search of the site, there are a lot of forums posts on various forms of seller finance, and plenty more on getting started with out much money. And I know there are plenty of people on BP who have gotten rolling starting with very little

@Jean Bolger  Thank you for your advice! 

I can be patient. 

Last night I finished the ebook "Things I wish I knew when I first started". (I think that's what it is titled). Lots of words of wisdom. One big take away I got was to stay focused, find your niche, write down your goals and get after it! 

You mentioned seller financing, which was in the ebook as well. I am not familiar with this subject so, yes, I will do a keyword search on this! Also a great idea! 

Thank you for your time. :)

Partner with someone who has good credit.  Pay them for it.  Be the promoter.

Originally posted by @Stephanie Hay:

For about 2 1/2 years, I have been Self-Employed. According to my tax return, last year I broke even. While my income has increased drastically this year, I will still have some deductions. 

I've been thinking about finding a multi unit and living in one of the units to qualify for first time home buyer/owner-occupied FHA financing.

What is everyone's experience with investing as Self-Employed?

Would it be worth my time to get a part time job? Then there's that saying, "work smarter, not harder". 

A few people have approached me about wholesaling and flipping to get some capital first. 

Any advice or experiences is greatly appreciated! 

Thank you.

 HI Stephanie,

It sounds like your dilemma will be an income one since the lender will average your 2014 and 2013 over 24 months to derive a qualifying income number for your application.

So it depends on what your current obligations are, how much income you're projecting to have in 2014 and what you did have in 2013. A lot of times there are additional items you can write off while being self employed that can be added back to increase your income figures and knowing which items these are can help you plan your taxes to have a less stressful time trying to obtain financing.

One option is you could use 1 year tax return conventional financing which would allow you to file 2014 taxes early in Feb/Mar 2015 and use only the 1 year average of 2014 to qualify. The down side with this strategy that might give you a higher income number would be that it requires 2 year landlord experience(FHLMC) unlike the typical 2 year tax return program (FNMA). The advantage of knowing which one to use will depend on your loan officer and review of your income. If your 1 year 2014 average monthly income is high enough to qualify then you may not need to use the 1 year tax return program and vice versa.

Regarding a part time job, with regards to qualifying part time income cannot be used in a qualifying context unless you've been on that part time job for 2+ years. I guess if you need extra cash you could get a part time job but thats a different story.

Let me know if that addresses some of your qualifying questions.

Stephanie

What @Albert Bui said is correct. Freddie allows using the most recent 1 years worth of tax returns, however you may not be able to use projected rental income (I need to double check for owner occupied multi family, SFR investment you definitely can't).

Also, FHA may not be your best option. Rates are lower and they can finance more but the fee's are higher, and if you finance over 90% the monthly MIP now stays on for the life of the loan.

Joe Impagliazzo
1-800-333-3004 x3138

Here are the ideas I would suggest:

1. Seller finance

2. Private lending

3. Partnerships

4. Subject-to

5. Hard money loans

Not that any of these are "easy"...

Stephanie,

This is a very good question. It sounds like you have cash flow issues. This can be solved in many different ways. One of those ways, could be to get a part time job and use the additional capitol from the job start to start wholesaling properties. Once you receive your first check you can quit your part time job and now you have just created an additional income stream. You can show the lender income statements from your wholesaling company plus the money you're making from being self employed and that should solve your proof of income issue.

Thank You.

@Stephanie Hay  

I can speak from experience with this topic.  It's frustrating, but there are ways to get financed.

I understand the purpose of writing off expenses against income to lower our taxable income.  I do the same thing.  I ran into the same similar issues.  There's some great info in this thread.

For instance, what was just said about a part time job, it won't count towards your income for typically 2 years.  Otherwise, more people in your situation would have done the same thing temporarily to increase the amount they can get approved for from the bank.

I think you should put together an action plan.  For instance, determine the type of property you want to purchase, and the price range, then work backwards from there to determine how much income you'll need to prove (assuming you'll go the more traditional route of financing).

In my personal case, I incorporated, and have everything invoiced through my entity.  Then, I pay myself a "reasonable" salary and receive bi-weekly paychecks.  You could potentially do the same thing if the numbers make sense.  Also, being that you are a licensed massage therapist (according to your profile), it might make sense to do something like this, as it can provide other forms of asset protection to protect you further from any potential claims that could arise in the future.

Also, sometimes the easiest and simplest solution would be to find a co-signer. I was lucky enough to have my brother co-sign for my first property, and 2 years later I was able to re-finance, lower my interest rate, remove PMI, and remove my brother from the loan. If you can show a potential co-signer your long term plan, and that you've done your homework, they may be more willing to help you out.

Also, in case you haven't already, look into Homepath financing as an option to avoid PMI if you're going to be putting down less than 20%.

I have property in Davenport, IA, I noticed you're from Iowa.  I used to live there.

Paul

@Stephanie Hay

I looked into Freddie Mac guidelines, and you can use projected rental income for the other unit's when it will be an owner occupied multi family. Since it is owner occupied, they do not require a 2 year history of rental income on your tax returns. Freddie will also allow you to use the 2013 tax return income only. You will need to show 6 months reserves PITI for the property.

Joe

@Joe Impagliazzo  Thank you for looking into that for me. That knowledge is extremely helpful!  

There are so many investor rules when looking at financing options. For 2 years, I worked at Wells Fargo (on the foreclosure end) and saw it from a different perspective so I see why there is all these regulations and strict rules for being approved for financing. 

Currently, I am looking at a triplex in the area for sale. I would prefer to start with a triplex or more.

In order to use the income from the other units, would it currently need to be rented? Could you have someone lined up? 

Originally posted by @Stephanie Hay:

@Joe Impagliazzo  Thank you for looking into that for me. That knowledge is extremely helpful!  

There are so many investor rules when looking at financing options. For 2 years, I worked at Wells Fargo (on the foreclosure end) and saw it from a different perspective so I see why there is all these regulations and strict rules for being approved for financing. 

Currently, I am looking at a triplex in the area for sale. I would prefer to start with a triplex or more.

In order to use the income from the other units, would it currently need to be rented? Could you have someone lined up? 

 I have this scenario right now where I am working on a 4 plex that is current vacant. It's key to note that on a purchase using conventional financing you can use 75% of the projected rental income of all 4 units (non owner transaction). The appraiser will conduct what is called a "rental survey," which in essence is a comparison on what a similar unit would rent for nearby and from that they derive a gross monthly income number.

Its important to note that on a refinance you have to actually have tenants to use net rental income while a purchase you do not(projected). This was confirmed by the head UW at my bank on conventional.

@Paul Hoeppner Great ideas. Do you keep your RE income and your Production business separate? Did you go with a sole proprietor, LLC, or corporation?

I pay myself weekly from my business account to keep things organized and myself on a budget. For now, I am a sole proprietor for my massage business. Is there a system (like Quickbooks) that you use to keep your income/expenses organized? 

I bet you don't miss Iowa from Dec-March! 

@Albert Bui  Thanks for the quick reply! 

Since this is regarding conventional financing, would a certain percentage need to be put down? (20%) ?

@Stephanie Hay

@Albert Bui is correct, the appraiser completes a rent schedule, and underwriting normally will use the lower of a lease agreement or what the appraiser thinks the rent will be.  So basically there is no need to worry about the lease.  Also, on a 2-4 family conventional loan you do need to put down 20% for Freddie.

@Stephanie Hay There are other software like Xero . Just remember if you are using an online software, you will pay for multiple companies. Specially when you have different EIN's. If you run all your business under one EIN, then make sure they have the capability in tracking each business income, expense, asset and liability NOT just by using Accounts.

Why do not you want to use QuickBooks?

Originally posted by @Stephanie Hay:

@Paul Hoeppner Great ideas. Do you keep your RE income and your Production business separate? Did you go with a sole proprietor, LLC, or corporation?

I pay myself weekly from my business account to keep things organized and myself on a budget. For now, I am a sole proprietor for my massage business. Is there a system (like Quickbooks) that you use to keep your income/expenses organized? 

I bet you don't miss Iowa from Dec-March! 

 I keep the RE income and Production business separate.  The production company is setup as a corporation.  I keep my books pretty organized just using custom excel spreadsheets that I've created.  Also, I pay myself through a payroll company Intuit.  It's free with a BOA business account as long as you are direct depositing your payments for your employees, myself, into another BOA account.

At the end of the year, Intuit generates a W-2 for me and the total tax due from payroll.  The software also reminds me when to pay my taxes electronically.  At the end of the year, I turn over all of my expense reports, payroll information, 1099s, etc to my tax person, and they handle the rest for me at a very reasonable discounted rate since it's very well organized.

I do not miss Iowa!  Occasionally in the late spring when it hits 100 degrees here!

This post has been removed.

@Stephanie Hay  - I'd suggest reading up on the 5C's of lending so you know how to best prepare for going in when you do meet with a lender at some point.

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