What is the best move to be eligible for financing?

Question

I recently left my travel industry of one year and am currently a nanny making more money (roughly $800-$1000) a week however this is cash so it is non-taxable income. I also work part time as a server for extra money during the Summers (taxable). I would like to get into a multi-family in Connecticut asap once I have a little bit more money for reserves and downpayment. ( I am  also a licensed agent but have not been active over the past year and a half.)

I am hoping for some guidance on what I should do as far as my income. I am considering forming an LLC and making my nannying jobs a legitimate business. However I want to make the right move that will get me to the goal of  being qualified to purchase a multi-family as soon as possible.

Any advice or suggestions appreciated!

Doug Smith · Answer

A couple of people have mentioned "DSCR" loans, or Debt Service Coverage Ratio loans. These are loans that are made to an entity (LLC, S-Corp, etc) that you own with you personally guarantying it. There are plusses and minuses to it as you'll have to put 20%-25% down plus closing costs and reserves, but your personal income or employment status won't really be an issue. We have an appraisal done on the property and we add a "Fannie Mae 1007", which is a form included in the appraisal where the appraiser assigns a market rent for the property. The Debt Service Coverage Ratio, or DSCR, = Monthly Market Rent/(Monthly Principal + Interest + Taxes + Insurance + HOA). That's it. Most lenders will approve it at a DSCR of 1.0 or higher. Experienced investors can go lower, but it's more expensive. The higher the number the better. It will allow an investor to scale, but the rate is going to be 1.25% - 2.5% above Fannie Mae 30 year fixed rates for a residence. With rates where they are, it is making cash flowing deals tight, so you'll want to watch for that. Multifamily (5+ units) won't qualify for a lot of these programs, but some will do them. I hope that helps you.

Eliott Elias · Answer

All you have to do is find a good deal. If your property DSCR’s 1.25 then you can qualify for a DSCR loan. As long as your credit is not terrible.

Konstantin Ginzburg · Answer

Requiring 2 years of revenue documentation is a common practice for lenders so that is a valid concern. You might have to ask quite a few lenders before you find one that is willing to accept this additional revenue stream. But think of this way: two years will pass no matter what you do, if you make the change now; you will be better positioned to get real estate 2 years from now even if you are not able to find a lender before then. Real estate is a very long term strategy so it will require a lot of consistent work now to pay off years down the line.

Kiana Rose · Answer

That is what I was considering, I have good credit roughly 700 on track for 720 by next month

Sasha Mohammed · Answer

My first question is whether or not you intend to live in the property.

If the answer to that is "no", then I would consider the DSCR route mentioned above ^

If the answer is "yes", then consider you will have to qualify with income... but that doesn't necessarily mean you need to file your cash as taxable income. There are other ways to qualify as well, for example: a bank statement program or P&L program.

It could be a good idea to start an LLC anyway. This will come at a small cost (filing fees, reporting, potentially a little more to the CPA to file your taxes)... but it could open up options down the road.

Jay Thomas · Answer

Forming an LLC might be a great way to legitimize your income and make it more attractive as you look for real estate investments in Connecticut. It is important to consider the cost and time associated with creating an LLC, but it could pay off in the long run by helping you qualify for mortgages or other financing that would not otherwise have been available to you. I suggest consulting an accountant or an attorney for you as they can assist you in that professionally. Also, getting re-licensed as a real estate agent will open new doors in terms of access to properties and resources that can help you find the right multi-family investment opportunity. Good luck!

Dave Skow · Answer

@Kiana Rose- thanks - if you want to buy a  proeprty to  live in / house hack - you will need  solid  income / employment that  can be  valaidated  in order to obtian a loan ....if you remain slef employed -  report  your income as lenders  will use  net income  figures for  qualifying purposes and  will need  a solid  2 yrs  of returns  for  qualifying purposes   2)  if  buying it as a rental - consider dscr loan which  will require a larger  down payment - good luck

Kerry Noble Jr · Answer

make the nanny job an LLC and pay yourself a salary. hows your credit?

Kiana Rose · Answer

Thank you! Is there any way around the two year income since this will be considered "new" income as this would be my first year? Aside from DSCR?

Kiana Rose · Answer

Thank you, this is very helpful. My only concern is denial for short job history once I start claiming this income. Won't I have to wait 2 years if not even more since I am a 1099 employee?

What is the best move to be eligible for financing?

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