Best scource of income
Rental Property Investor · York Pa · Member since 2023 · 18 posts · 14 votes
Best scource of income
2 Replies
- 10moStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 521 votes
It depends on what kind of loans you are trying to qualify for. For conventional or loans based on borrower income, W2 jobs generally have less paperwork such as paystubs and W2s. If self employed for conventional, tax returns will be necessary plus other paperwork depending on the lender. If trying to do less paperwork and buying an investment property, many investors go the DSCR route.
More on DSCR loans: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.
Here's a bit more in detail about how rates are calculated for DSCR loans:
1. Credit score- the higher the better. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.
3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.
4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.
I've included an example below to help illustrate this.
So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.
See example below:
DSCR < 1
Principal + Interest = $1,700
Taxes = $350, Insurance = $100, Association Dues = $50
Total PITIA = $2200
Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91
Since the DSCR is 0.91, we know the expenses are greater than the income of the property.
DSCR >1
Principal + Interest = $1,500
Taxes = $250, Insurance = $100, Association Dues = $25
Total PITIA = $1875 Rent = $2300
DSCR = Rent/PITIA = 2300/1875 = 1.23If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.
DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.
Happy to connect to discuss further.
Bright Skyline518 Reviews - 10moAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
Great points from Stacy on the lending side, especially how W-2 income makes conventional loans easier and how DSCR loans give investors more flexibility once the property cash flows. That's a great point for anyone thinking about financing options.
From a tax perspective, @Elmer Wayne Fisher, self-employment usually gives you more freedom to plan. W-2 income is harder to reduce because there aren’t many deductions available. As a business owner, you can use entity structuring, expense deductions, hiring family, strategic retirement planning, and even HRAs to lower taxes while still benefiting from real estate strategies like depreciation and cost segregation.
Business income has no Section 461 limitation to offset as much income as possible with RE. W2 has.
Both paths work for real estate, but tax flexibility generally increases when you’re self-employed.
Good luck, and happy to connect!
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