So I have been looking at property here in Austin for a while. I have figured out that I am ready to purchase my first duplex and have found a few that cash flow and are in areas I consider sound.
I have a problem. I am 28 years old, have been self employed forever, and have never borrowed money. So I have no credit. I got a credit card but its brand new and so I am just get credit started. I am just not sure what to do next. I applied for the tradition FNMA mortgage and was denied.
I have plenty of cash, but banks don't care about that. They want to see my tax returns, which is fair of them; however, as a small business, i have written off as much as I could for the last few years and it looks like I only make about 40k a year.
I am planning on a buy and hold (for at least a decade) strategy and unfortunately, because Austin is relatively expensive/ bc I'm not flipping, Hard Money just will not work (it kills the margins in a violent and gruesome death). I have been given the suggestion of going and meeting with portfolio lenders, of which I have found a list here on Bigger Pockets. I have been told to consider finding a rich friend and getting them to cosign.
Finally, about half of the multi fam properties here in Austin have been paid for in cash this year so far, so I have considered just using all of my money to get into my first house and then pulling equity from it in a year or two. But this seems like a huge waste of reserves I have built up so I will have a cushion for vacancies/repairs/etc.
I don't know what to do. Do i need to just leave Austin alone and go to some cheap city and buy cheap multi's there or do I tough it out here and hope to find a portfolio lender or do I try to bribe a rich friend or do I use all my cash to get into something I can refi later.
Any suggestions would be greatly appreciated.
Do you have any close friends or family members with good credit? If so, you can ask them to add you to one or all of their credit cards as an authorized user and you will quickly inherit a good credit history. It is called "piggybacking" I believe and it may work since all you need at this point is a credit score. There are also companies that will sell this service to you, but I guess it is fairly expensive.
If you don't have access to someone else's credit then maybe you can partner with someone to buy something, or simply pay them to use their credit to secure a loan.
If that doesn't appeal to you either then perhaps buying all cash, perhaps in a less expensive area, then financing the property after it "seasons" would be an option. Some banks allow 6 months of seasoning, others a year. Good luck!
If suggest trying a different lender. There are all kinds of options, banks, credit unions, mortgage brokers, etc. I'm here in Austin, and an agent, and I can connect you with at least a dozen different lenders. Lmk.
You mentioned being self employed so do you have credit under your company? Maybe the company can be involved somehow?
consider creating Solo 401k retirement plan. It has the feature allowing you to access funds in your retirement account without taxes and penalties before you even retire. Might be very helpful for some of your future deals.
@Graham Mink I have never heard of piggybacking but it sounds like a legitimate option. I am going to research it this afternoon and find out what a good way to compensate someone for helping this way would be.
I would go to the bank you do business with and talk to an officer of the bank and ask him how much money you would need to put down on a portfolio mortgage for them to feel comfortable. I would try that with a few lenders and see where it takes you. Worst case, pay cash at least it gets you started. Food for thought.
John Moore, John Moore Homes | 570 620‑8080 | http://www.johnmoorehomesllc.com
@Dmitriy Fomichenko I have seen conflicting information about solo401(k) eligibility. If I have a LLC for fix and hold investing with 2 others and no employees, does that qualify for a solo 401(k) plan? I realize I can only contribute based on the taxable income of the LLC, but can I use the LLC as a business to establish the solo k from? Also, can I only contribute based on earned income, or is any taxable income eligible?
the key eligibility criteria here is self-employment activity. If you own LLC that is simply holding entity, then the income there is rental income, which is considered 'passive' and that alone would not qualify you for the Solo 401k.
Legitimate self-employment activity however can be easily established. There are number of ways to do so. For example, if you manage the properties held by the LLC, you can create separate entity (it can be simply sole-proprietorship) that would do management function.
The contributions are based only on your earned self-employment income (not the passive income from rentals or other employed income).
Hope this helps.
@Dmitriy Fomichenko does that apply when doing significant repair/renovations? That would seem to be employment activity, coupled with passive income.
I read that "piggybacking" no longer works. I would research this further.
I feel for you- I have always been self employed and it sucks as far as getting residential mortgages- especially the first one
Do you have family that you trust (both emotionally and financially) and trust you? You could ask someone (your parents?) to co-sign on the mortgage. Then you could work on refi-ing out into a mortgage just under your name after a few years.
There are potential inter-personal issues with this, of course, and I wouldn't suggest it unless your family member is financially secure and you're also very sure that you wouldn't be putting their credit at any risk.
Jean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com
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