Rental Property Investor · St. Louis, MO · Member since 2019 · 162 posts · 72 votes
I can foresee a real estate path that allows me to leave my W2 job and the thing that keeps rattling around in my mind is that having a W2 makes getting a conventional loan possible/easier?
For those that leave a traditional W2 job and replace it with a combination of predictable investment income (rental income) and unpredictable real estate income (wholesaling, agent commissions or similar), how do you continue to get the financing you need to refi a BRRRR deal?
@Peter Tverdov , @Matt F. and @Account Closed - Almost all of the lenders I use for my personal portfolio will loan based on the financials of the property and not the borrower. Most of them lend nationally. It took years to find all of these lenders but it was so worth it. Getting to 127 rentals with no W2 income and tax returns that showed losses made finding these types of lenders a necessity. Don't get locked into the mentality that you NEED a W2, or stellar tax returns. It can be done without.
You must have two years of tax returns to show your income from other business ventures. I was working my W2 job while investing in real estate, wholesaling and selling turnkey rentals. After about 3 years of solid income from those efforts I quit my W2 and haven't had any issues qualifying for loans. The key is making sure you have at least 2 years of tax returns to show income from real estate! Keep in mind that you likely won't be able to qualify from rental income alone. You should be showing very little income if any at all on rental properties. The income will come from the active real estate activity. Wholesaling, fixing and flipping etc.
@Stephen Akindona Sorry if this is a basic question, but are the tax returns required to be from one company/organization only, or as long as you have 2 years of tax returns regardless of the company?
@Robert Kirkley it is best to check with a lender for the exact rules but to my knowledge it doesn’t have to be the same organization. It does have to be in the same career field. So if you make 100k in year 1 wholesaling and then quit wholesaling to start a bakery, even though you make 100k in year 2 with the bakery that is not 2 years of tax returns in the same field. But if you made 100k in year one in wholesaling and then quit wholesaling but started fixing and flipping. Your income would qualify!
I can foresee a real estate path that allows me to leave my W2 job and the thing that keeps rattling around in my mind is that having a W2 makes getting a conventional loan possible/easier?
For those that leave a traditional W2 job and replace it with a combination of predictable investment income (rental income) and unpredictable real estate income (wholesaling, agent commissions or similar), how do you continue to get the financing you need to refi a BRRRR deal?
Any income that is variable such as your money you make running your own business, independent contracting work or commission based income of any sort is going to require 2 years of tax returns before a lender will consider it as part of your DTI.
I can foresee a real estate path that allows me to leave my W2 job and the thing that keeps rattling around in my mind is that having a W2 makes getting a conventional loan possible/easier?
For those that leave a traditional W2 job and replace it with a combination of predictable investment income (rental income) and unpredictable real estate income (wholesaling, agent commissions or similar), how do you continue to get the financing you need to refi a BRRRR deal?
Use a portfolio lender. Rates and fees are higher, but you can get a 30 year fixed or ARM with no income verification.
You might also consider a mixed strategy. A part time job and full time real estate career might be the answer. Or alternatively, leveraging the W2 job of a partner while you work on real estate is another solution. The bottom line is there are several good strategies, and the world is your oyster!
I can foresee a real estate path that allows me to leave my W2 job and the thing that keeps rattling around in my mind is that having a W2 makes getting a conventional loan possible/easier?
For those that leave a traditional W2 job and replace it with a combination of predictable investment income (rental income) and unpredictable real estate income (wholesaling, agent commissions or similar), how do you continue to get the financing you need to refi a BRRRR deal?
Use a portfolio lender. Rates and fees are higher, but you can get a 30 year fixed or ARM with no income verification.
@Stephanie P. How would I find a portfolio lender for Texas also do I have to show them cash reserves and what kind of down payment?
Some portfolio lenders require cash reserves, some do not. It depends where the broker is going to send it. If reserves are an issue, they just won't send the loan to the one that requires it.
Hey Matt! Good question. If you already have an LLC set up for your investments you can actually issue yourself a W2 as an employee if you elected as an S-corp.( Possibly as a regular LLC as well). This shows stable income to your lender but obviously you want to have established payments to yourself before approaching since some lenders depending how strict their policies are might go back 6 months to a year if they find out you are also owner of the LLC. I am only speaking from experiences I had hope this helps!
Hey Matt! Good question. If you already have an LLC set up for your investments you can actually issue yourself a W2 as an employee if you elected as an S-corp.( Possibly as a regular LLC as well). This shows stable income to your lender but obviously you want to have established payments to yourself before approaching since some lenders depending how strict their policies are might go back 6 months to a year if they find out you are also owner of the LLC. I am only speaking from experiences I had hope this helps!
If you own more than 25% of the corporation, you should be required to show 2 year's tax returns (personal and business). If you didn't, there are probably a lot of folks on BP that would love to know who that lender is.
Yes @Stephanie P. that is true my apologies thanks for correcting me, I forgot to mention that part for traditional financing. However I do know some of my buddies have used traditional, portfolio and even hard money lenders that it was not required to disclose ownership. Every lender is different that is why networking is an integral part of real estate investing!
Yes @Stephanie P. that is true my apologies thanks for correcting me, I forgot to mention that part for traditional financing. However I do know some of my buddies have used traditional, portfolio and even hard money lenders that it was not required to disclose ownership. Every lender is different that is why networking is an integral part of real estate investing!
No apology necessary. I was sincerely wanting to know who would do that. 2 years income documentation for any Fannie or Freddie loan is standard. There are several lenders that would only require bank statements and several portfolio lenders that wouldn't require anything.
@Peter Tverdov , @Matt F. and @Account Closed - Almost all of the lenders I use for my personal portfolio will loan based on the financials of the property and not the borrower. Most of them lend nationally. It took years to find all of these lenders but it was so worth it. Getting to 127 rentals with no W2 income and tax returns that showed losses made finding these types of lenders a necessity. Don't get locked into the mentality that you NEED a W2, or stellar tax returns. It can be done without.
As an FYI - a portfolio lender might get you a 30 year mortgage but that rate is going to be 6.5-7.5%
@ Peter T.
Are those rates horrible? On my first purchase, we used FHA and the rate was 11%. We were excited to refinance to 8%. Those were owner occupied rates (I know, showing my age:).
To be clear, bank financing is way cheaper and no one's hiding the portfolio rates and it's true that portfolio rates are higher, but let's really look at what they are and not vilify some really great rates because they compare unfavorably to today's rate compressed market. The point is, we are still in a period of historically low interest rates, even for portfolio.
As an FYI - a portfolio lender might get you a 30 year mortgage but that rate is going to be 6.5-7.5%
@ Peter T.
Are those rates horrible? On my first purchase, we used FHA and the rate was 11%. We were excited to refinance to 8%. Those were owner occupied rates (I know, showing my age:).
To be clear, bank financing is way cheaper and no one's hiding the portfolio rates and it's true that portfolio rates are higher, but let's really look at what they are and not vilify some really great rates because they compare unfavorably to today's rate compressed market. The point is, we are still in a period of historically low interest rates, even for portfolio.
When your rate was 11% I highly doubt real estate value were where they're at today. That's not the best example. I understand what you're saying and some people will use it (heck I might myself one day) but people should be warned it's not the 4% rate their accustomed too and when I hear rates of 8%+ for 30 year money I laugh those guys off the phone.
As an FYI - a portfolio lender might get you a 30 year mortgage but that rate is going to be 6.5-7.5%
@ Peter T.
Are those rates horrible? On my first purchase, we used FHA and the rate was 11%. We were excited to refinance to 8%. Those were owner occupied rates (I know, showing my age:).
To be clear, bank financing is way cheaper and no one's hiding the portfolio rates and it's true that portfolio rates are higher, but let's really look at what they are and not vilify some really great rates because they compare unfavorably to today's rate compressed market. The point is, we are still in a period of historically low interest rates, even for portfolio.
When your rate was 11% I highly doubt real estate value were where they're at today. That's not the best example. I understand what you're saying and some people will use it (heck I might myself one day) but people should be warned it's not the 4% rate their accustomed too and when I hear rates of 8%+ for 30 year money I laugh those guys off the phone.
The first thing we tell borrowers when they come to us is they should pursue conventional financing. Why? Because it throws the elephant out of the room. If they can qualify for conventional financing, they should go get it for no other reason than because it's cheaper. Once that's dealt with, we (the borrowers and us) can move on to the application and hopefully closing because that objection/condition is eliminated up front. You're right, the borrowers should know what the rates are and we always fully disclose our rates and fees on a loan summary, but comparing our rates to something a borrower can't get because they don't qualify is silly and throwing a perfectly good loan away because of rate is also silly. It's all numbers. Either they work or they don't.
Here's a typical example:
Borrower finds a property to buy that's below market because it's a mess, or it's in probate, or he's getting it from his Grandma or whatever. He buys it for 150K with hard money at 85% ltv with 100% of the money for rehab provided in draws. Cosmetic rehab costs about 30K. Rate was 10% and 3 points on the hard money. Rehab is complete and the borrower changes his mind and wants to keep the property he formerly wanted to flip. Rehab was light and property rented in 3 months because it's a pretty hot area. We do a refinance at the new appraised value after it's stabilized and the new value is 280K. New loan amount is 210K at 75% ltv. At 7.5% on a 30 year fixed, the P/I payment is $1468. Taxes around 200 and insurance around 100 for a total of $1768. Rents go for $2200. Not a home run, but for many, $400+ per month adds up. To recap, their first loan was 180K. Carrying costs and closing costs were about 23K on both loans, so the all in cost is 203K. Borrower walks with a few thousand in his pocket after all is said and done and a monthly profit on a renovated property. BTW, he didn't qualify for Fannie Mae because of the seasoning and his debt ratio was around 55% with vacancy loss. Does he pass on the deal? Some may, but he didn't. The borrower assessed the cost and the risk and went forward because we had a product that would accommodate him. The difference in the two rates (Fannie vs ours) is $400 per month. Sure the profit is higher with cheaper money, but if he didn't qualify he couldn't get it. If he couldn't get it and we didn't have the product for him, he would have gotten nothing. $400 per month and a few thousand in your pocket is better than nothing.
You're right though, the values weren't where they are today. That's a totally different discussion (the values versus the interest rates and whether there is a correlation between the two). Some say there isn't and there was a whole thread on it a while back. @Russell Brazil had some very good numbers on it.