How do I make a business that shows income that lenders like....

Question

Specifically, I’m trying to figure out how to create a legitimate business that shows income for the purpose of gaining future lending. We currently have 3 properties; 1 is long term rental, 1 is a fully furnished short term (Airbnb), and the other is in construction and we don’t know if we should make it short or long term. We will be needing funding following the completion of this project, and want to lay the ground work for a business showing income that banks like. We’ve been told by some banks that they don’t consider Airbnb to be a constant income source. With the current covid situation, we can all agree that has been true. However, is there a way to bundle all of this income and put it under a business umbrella to show consistent income? Who could I talk to to get guidance? How should we go about this? Any help would be appreciated!

Jeff Copeland · Answer

There are lots of way to structure a business, and lots of considerations when doing so (reduction of taxes and liability, future sale potential, to accommodate different owners/partners, etc.). And any business can (and arguably) should have multiple income streams.

These are all factors you should discuss with your attorney and CPA, since many of them will be unique to you.

From a loan underwriting perspective, I think the important thing is to have steady (or increasing) year over year income.

Very generally speaking, a mortgage underwriter likely won't care whether you make $100k via a pass-through entity, took $100k worth of payroll, or took $100k worth of K-1 distributions. These may have wildly different tax implications, but to an underwriter, they are all $100k worth of income towards your DTI.

That being said, I think it's safe to say some combination of salary (so you are still paying into social security and keeping the IRS off your back) and K-1 distributions (to minimize FICA taxes) is a pretty common model for business owners.

What type of business structure do you have now? And what income streams are you thinking of diversifying into? Is this strictly a question of "should we do short term rentals, or long term rentals"? Or are you looking to incorporate something else entirely?

How do I make a business that shows income that lenders like....

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