questions about creative financing

[Jon Henzel]

Hello, 

My plan for the upcoming year is fairly aggressive, at least for my standards. I currently own 3 rental properties, all in NC and managed by an excellent property manager. They are all rented out on year long leases and are expected to maintain the respective leases for the foreseeable future. I am earning a total of $472 monthly in excess cash flow after considering PITI. My plan is to rent out my current home and manage the property on my own as well as acting as my own RE agent for the upcoming three purchases, the totality of which I am expecting to qualify me as a RE Professional and utilize the full deductions available. I was thinking of getting a cost segregation done and using accelerated bonus depreciation to offset my W2 income. Is this worth it?

If I can use the cost seg studies to eliminate my W2 income taxes, is it prudent to then stop taking a high level of taxes out of each paycheck?

In total, I am planning on buying a condo that is steps away from my office and converting my current home into another rental, which I would manage. I would then immediately start looking for a commercial space in Boise to open a satellite office for the current practice I am with. I would purchase that space and execute a NNN lease with my employer for the space. I was thinking of using a DSCR loan for the commercial space given the contract will fully cover operating costs. After the commercial space is secure, I would then move to Boise and look for a modest primary home that I would convert into a rentail in about 3-5 years and upgrade my living quarters. I currently have about $58,000 in cash but would prefer to maintain that there.

With all that said, is there a best way to consider creative financing to make each of these purchases? Thank you for any advice or guidance you can offer.

-Jon

[Jason Wray]

Jon,

I would do more research on CS and W2 income especially if your using it to offset bonus income. I would ask your employer to simply pay you 1099 on the bonus and then you can talk to your CPA/Tax preparer and see if a Schedule C or LLC would make more sense.

At some point in the future it will come due and it may be a year when you are trying to qualify for a major purchase or multiple purchases and hurt the DTI. I would also start making some calls in regard to the underwriting requirements of a commercial loan. As a Banker I have seen many people assume they can easily qualify for a commercial loan and that is not the case with 60% of the people who apply blindly without doing the upfront research.

Just having excellent credit and showing income or a business proxy that can or will make (proposed) money is not enough. It requires a resume or proof that you can and have managed a similar business with success. Some commercial lenders require landlord experience of multiple properties for 3-5 years in order to get a reasonable rate or the deal approved.

They can also require 12-24 months PITI reserves, Transition employees, occupancy ratios, previous year P&L or last 12 months receivables of previous owner. As far as DSCR in most cases the lender wants a DSCR ratio or 1.25% or higher and no vacancy of units.

If you plan to keep buying homes and your W2 income is capped or it causes issues, cost segregation may only be a temporary help (may hurt as well). I would look into Non/QM like Bank statement program, 1 Year 1099, CPA letter options, etc. At the end of the day do your homework up front and talk to seasoned Realtors, Bankers, and CPA's.

Basically, use Bigger Pockets to start building a Network and put a game plan together a head of time to prevent issues down the road, so you know the right moves and what is needed in advance!  Feel free to reach out if you have any questions always happy to help other BP members.