Hurdles of being self-employed while trying to start in RE

11 Replies

Hi, I make $50k per year and have $25 thousand in savings, unfortunately I file a 1099 and not a W-2 so my question here is, what sort of hurdles would I face while trying to get started in real estate while continuing my job as an independent contractor here in Los Angeles, Ca.? 

I too am Self Employed. I’m about to close on my first deal and the only way the bank would provide a commitment letter is through a partnership. Find a partner who has great W2 income, that’s what banks like to see.

It's definitely tough to get financing when you're self-employed. The other guys have brought up great points. You can also use hard money or private money if you have people who trust you enough to loan to you.

thank you all for replying. I’m very entrepreneurial and have always wanted to start my own business, but it wasn’t until just recently that I figured out that real estate is the business I want to get into so, I’m asking the dumb questions now so I can hopefully prevent a headache down the road. 

Many of my clients are self employed and they have no problems getting loans. Lenders will look at your prior two tax returns and will use the lower number to qualify you. They'll also verify all current year income and ask for a YTD profit and loss statement from a CPA. If your income is steady and predictable you shouldn't have any problems.

I don't think that it's a challenge any more than having a regular job is a challenge. There might be a bit more paperwork, but as long as you have two years of tax returns (just like you'll need with an ordinary W2 job...) you'll probably be able to find a conventional lender who'll be able to work with you. Typically, the problem of getting financing comes from folks who are "self-employed" but have income coming from all sorts of irregular activity. For example, if you are a "consultant" and have "consulting" gigs that are irregular and sporadic and have no consistent business that seems sustainable to an outsider. But if you have a real business setup, and have been operating it for at least a year or two (with two years tax returns), you should be able to go to many lenders and get quality access to financing -- albeit with more paperwork than the other guy with the W2. If you are an independent contractor with multiple years operating in your business and reasonable consistency in that income (you don't have one year with $30K and one year with $200K and are trying to claim you make $200K) then you need to keep calling lenders until you get one who can work with you, in my opinion.

If my real estate side business and my book royalties from Set for Life (next year) can help me qualify for a loan, in addition to my W2 income, then I don't see why someone with consistent income from self-employment is having trouble -- perhaps the trouble is more in demonstrating consistent income from a sustainable source? 

Where people get in trouble with self-employment income is when they have a bunch of small income coming from a bunch of different sources. If you have concrete, established businesses with consistent income spanning multiple years, these problems seem resolvable. If you just started your business 6 months ago and claim to be able to produce a six-figure income, the bank is going to question your ability to sustain that income - I know I would.

Sometimes it can be funny. I got a laugh one time when a lender called ME to verify my BOSS' income...

Assuming you have multiple years of verifiable income from consistent sources, then aside from the incremental paperwork, you probably have the advantage over your W2-earning competition in being self-employed at being able to flexibly bend your schedule to your real estate investing needs. Where real estate research, showings, inspections, and closings make more sense than working on or in your business, you can just go without having to request time off.

Thank you for taking the time to reply and clearing that up for me. I’m all the more motivated to get started after reading all the positive replies. I may be self-employed, but my income is consistent. I know how much I’m going to make a week or a month from now (given I don’t take a day off). What’s more, I have a credit score of 750+ and without the fear of being rejected anymore, the only obstacle left for achieving my goal in getting started in real estate would be myself.