Did you do this for your first loan?

6 Replies

Hi folks, I’m planning to buy a multi family in so cal and ran into an issue with my lender. I make high 5s a year but am an independent contractor so I write off a lot of what I make to take best advantage of taxes. I get that my AGI will be less than what I earned, basic tax stuff here. The lender took the lowest number for my income at 60s and said max I can borrow is 450,000 even though I only had 17 in write offs. That buys nothing in LA and is laughable because the bottoms barrel multifamily is 550,000. Seems like I’m running into this with other lenders and am unable to get my loan amount higher, any suggestions? Would love an experienced investors’ opinion on this. Cheers Jonathan

Buy a multi to house hack one side and you can use the rental from the other to boost your DTI. Then after a year, rent both.

Just keep working at it and you will get there. Finding a deal that works and a lender to give you money is pretty much the hardest part of this business. 

@Jonathan Taylor generally this can resolve by giving lender audited profit & loss worksheet for current year. You have to convince  U/W with paper trail your income is going higher in current year. Wait till march  when 1st quarter end of this year. They will take the higher income with this step. 

@eric C

That’s the plan and why I’m running into difficulty. Duplex for purchase and I’ll be living in one unit. Aside from the lender problem, most deals I see don’t even cash flow when I eventually move out.


Can you delve a bit more into that please? I did make more, substantially, last year by about 23% from the previous year but spent more on my business due to the upcoming changes. So it only equals out to a 12% income growth over two years.

On that note then does anyone know a lender who works well with private contractors in Los Angeles?
Thanks for the replies.

@Jonathan Taylor Your problem relies on being an independent contractor, or self employed. 99% of the lenders are going to have the same answer. The issue is fluctuating income, you could have 30k first quarter and 5k second quarter, in short, lenders will not know if you can pay 3 months of mortgage on that second quarter, whereas if it is a W2, they will know that you will have the paycheck regularly and more assured you have something to pay their debt with. Now, you mentioned laughable, to me it is laughable for you to look for a multi family with that low of an income, i mean 50k or 60k/year is almost nothing in CA and you want to start with a multi which needs more
deposit, more management, and more strict underwriting. If you really go with that route, you will end up two things, a very high interest rate, or a very big deposit. Unless you can find that 1%.

Hi Jonathan,

I have closed a number of deals with self employed individuals in the last year and have similar points to make as the above posts.

The biggest problem is fluctuating income here. Self employed/independent contracts, as I am sure you know, can make nothing one month, and blow it out of the water on a big customer the next month. This provides a bit of am obstacle in the lending world because the income is not guaranteed in the way W2/salaried individual’s income is.

My biggest recommendation to you would be to start out with a smaller duplex or even a SFR and build to eventually obtaining larger multifamily’s. Even if you have to look outside of your immediate area to make that happen, that may be the best bet. The benefit here is it subtlety fixes the tax problem you are experiencing. With other investment properties (even small ones) you can deduct a lot of expenses, freeing you up to not need to deduct the same amount from your contractor earnings. This matters because there are “add back” items on real estate deductions that lenders do not count against you as a debt. The biggest one usually being depreciation.

Once you build a small schedule of real estate, lenders will most likely look much more favorably on your finances (especially if you can get some cash flow positives going on here).

Some lenders also very much prefer to lend to an investor that has the managerial experience. This matters a lot when considering building your SREO while qualifying for subsequent properties. The lender will use the debts from the first property against you, and the income from rental to boost your earnings. However some lenders will only allow a certain percentage of rental income (I’ve seen 75%) for relatively new rental managers.

You can see how it would be very easy to get into negative cash flow in the lenders eyes after takin off 25% of your rental income, especially in LA.

I’m totally open to questions. I love picking everyone’s brain I meet and helping out those I can. I am still relatively new to the industry, as well as BP, but am absolutely loving it so far.

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