Good evening all. We are Connecticut investors in the business of buying mulit-family residential properties (2-4), rehabbing and renting them or just simply flipping.
I am curious, from a bank/lenders viewpoint, what looks better to them in terms of obtaining a loan or a line of credit - showing solid profits (or no profits), or a healthy balance sheet? I am investigating if it would be advantageous for us to reduce our tax liability (decrease profits). Obviously, as individuals, we would like this, but I'm not sure if that will make us look weaker as a borrower. Or, if we have a solid balance sheet, would our Profit and Loss Statement even matter as much?
@Timothy Jacobson First off, I just read your profile and thank you for your service.
I have personal investing experience with the issues you bring up in your post and have clients here in CT that face these questions all the time when investing. To be honest, it is to much to detail in a post, it would take me forever to write out.
Feel free to reach out anytime and I can tell you what my and my clients experiences have been related to the tax issues you bring up in your post.
Where I would start if I were you is connecting with a real estate specific accountant like Ted Lanzaro, who is here on BP, to talk tax strategy.
@Timothy Jacobson , great question, and good to see you out here! This is always a double edged sword scenario. Bottom line is profits will get you loans easier, but you will pay more in taxes. Without writing a book (I like to keep it simple), if your goals are to look good on your balance sheet, you have to show lenders how "good you are" at creating a solid return on your investment. On the other side, you show break even (or sometimes losses), and have a higher cash flow (reduced tax liability), more potential capital of your own, but you risk commercial lender scrutiny. Personally, if I were to have the vision of scaling larger and quicker, I would show the strong balance sheet. How big and how fast you want to go, will be the true answer to this dilemma. Its an awesome dilemma to have my friend :-) Gotta love REI. Hopefully there will be a commercial lender on here who could give you much more solid advice to their field. If not, reach out, I have a commercial guy who is solid.
@Timothy Jacobson also a good idea would be to call local banks and ask them what is best - lots of good ones in CT.
What do you need? And what are your goals?
Your typical financing will like to see both profits and a solid balance sheet. Your best bet, if I understand your goals, would be to find a commercial product with no seasoning requirement AND lend based off the ARV value. (Because you work on rehab properties.) Your property will have to debt service, typically 1.2 and up. Some commercial lenders use a .5 buffer to underwrite.
My advice is to focus on the commercial product and relationships if you want to grow rapidly. Once you have those relationships, the process becomes easier.
Michael is a great resource and Ted is a great CPA with a RE background.
Rick is right, the balance between less profits/more taxes and more profits/less taxes is THE double edged sword.
Jonathan is right, connect with local banks. My advice is to focus on the credit unions that keep loans in house.