Lets hear from the self employed
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
Lets hear from the self employed
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7yOriginally posted by @Rich Hupper:
@Natalie Kolodij do you know what lenders look for on a self employed person's tax return to make their calculations? Is it adjusted gross income, net income, or gross income, or something else I am missing?
Is it true that paying more taxes translates into more borrowing power?
It's none of that. You can sneak preview for yourself here. There is a lot not covered at that link, that's just to give you an idea. One thing that you will not see at that link is the presumption that it's the same source of income over those couple of years. Meaning if "ABC Carpet Cleaning" had income in 2016 and then closed, and "XYZ Car Wash" opened in 2017, you don't get to average or mix those two -- "XYZ Car Wash" needs to be open for two tax years, "ABC Carpet Cleaning" will be calculated at $0 per year.
It's also the case that restructuring your business can in some cases reset that two year clock. Who is to say that "XYZ Car Wash" the Schedule C sole proprietorship (2016 tax returns) is the same business as "XYZ Car Wash LLC" (2017 tax returns)? It's "underwriter discretion" on that one, and "underwriter discretion" is a bad place to be, since you as the borrower have zero control over if the underwriter's milk went bad ruining her breakfast that day, and you (presumably) don't want a half million dollar real estate transaction dependent on the expiration date on a $4 carton of milk.
This is part of why CPAs and mortgage lenders are constantly at odds with each other, since great advice from a CPA focused on saving you tax dollars is often simultaneously horrible advice if you're goal is to buy a house next year and don't plan to pay cash.
81 Replies
- Miami, FL · Member since 2017 · 64 posts · 13 votes7yDo you know what's a "good" percentage of positive net income that would be a attractive to banks on a tax return? I know a CPA would help with this for sure.
Originally posted by @Mary M.:
I have been self emoyed most of my life.
The conundrum is that to be loan worthy for conventional loans you need to show stable income. However most businesses (even the self employed) like to pay as little tax as possible so this means showing little income.
Basically you cant have it both ways. So you have to plan far enough out.
My suggestion is to find a CPA to help and maybe not think of RE as a get rich quick scheme using little or none of your own money.
- Member since 2018 · 3 posts · 2 votes7y
Self Employed I have 2 businesses. One of which is REI, the other is healthcare. Had trouble getting conventional financing initially when I was straight 1099. With 1099 they want 2 years of consistency which I had, then when I switched to over to my professional inc., then they said I needed an additional 2 years now. All of this despite a steady consistent source of revenue from the same exact contracts. My agencies just started paying my company instead of me. When I first got in to real estate 3 years ago, I bought a wholesale deal that was "Subject to" with a good spread. I either did subject to or private money only for my first 5 deals before I went to hard money. Once I showed some success private money got a little easier from my close circle. I will attempt conventional after this year's filing and should have no trouble. Hopefully this will open up the rental market for me. I have 3 deals under construction right now.
- Rental Property Investor · Akron, OH · Member since 2018 · 30 posts · 32 votes7y
There are some easy ways to manipulate income on paper. I use an S Corp (it's a pass through entity just like an LLC) and then I pay myself a nominal salary. This plus a hefty amount of savings means I've never had a problem getting a loan approved.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes7y
Originally posted by @Aram V.:
Originally posted by @Mary M.:
I have been self emoyed most of my life.
The conundrum is that to be loan worthy for conventional loans you need to show stable income. However most businesses (even the self employed) like to pay as little tax as possible so this means showing little income.
Basically you cant have it both ways. So you have to plan far enough out.
My suggestion is to find a CPA to help and maybe not think of RE as a get rich quick scheme using little or none of your own money.
Do you know what's a "good" percentage of positive net income that would be a attractive to banks on a tax return? I know a CPA would help with this for sure.
The correct answer to this is whatever the actual amount of income is.
Choosing to under report expense to inflate income is filing a fraudulent tax return and may also be mortgage fraud.
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes7y@Rich Hupper I am a self employed contractor 15 years now. Back in 2010 I tried to buy a house for myself to live in. Foreclosure, $80k, 750 credit score, I had full 20% down. I couldn’t get a loan to save my life. Ended up having to have a non-occupant co-borrower co-sign for me. Got married in 2014, we bought a house together, but only my W2 wife on the mortgage. I then sold the old house, bought a rental property for cash. It’s to difficult anymore. I’d love to get a loan on my rental to buy another, I’m just not sure if I’m up to the task of trying to qualify. Gone are the days of no-doc stated loans. For those of us that actually paid our bills, they were awesome.
- 7yRobert VorhiesPro MemberRental Property Investor · San Tan Valley, AZ · Member since 2018 · 29 posts · 3 votes@Aram V. Both time I went through a broker that found the loan. First loan was first Franklin then it was sold to countywide. This year I went through fairway mortgage broker and that was sold to US Bank.
- Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes7y
@Matthew John Yes I think this is smart. Don't shy away from a good deal just because you need a cosigner. I am single so I do not have someone with w2 income who can cosign with me at the moment.
@Cody L. hahaha thats awesome. When you say commercial lending does this mean non recourse loans?
@Ken Nyczaj thank you for sharing.
@Alex Franks thanks alex
@Daniel Dietz Great point. I do not have any depreciation yet but soon hopefully I will
@Linda Weygant thank you for clearing that up. Definitely do not want to break any laws.
@Ryan Evans Thats great news for me I am going to keep plugging along.
@Aram V. right there with you. Looking forward to having an indepth convo with my accountant about my tax returns soon.
@Robert Vorhies I hear a lot of people talking about S corps but not C corps I will have to learn more about these.
@Matt M. I have 800+ credit and almost no bad debt. I have 3 successful flips under my belt and years of experience in the real estate industry. But conventional lenders do not care about any of that.
All they seem to care about is your net income on the schedule C form. Additionally I am not trying to buy a single family and live in it I am trying to get pre approved for cash out loans on future buy and hold projects. Every lender I have spoke with says my income is too low even though the debt coverage ratio is 1.2+ in my scenarios.
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Daniel Dietz:
Jumping back to 'the tax benefits' of real estate investing, one big one for self employed can be savings on the SE taxes, if I understand my tax guy correctly.
Let's say I have 60K in taxable self employment income (K-1 in my case). My SE taxes would be roughly 9K on that. Now bring in the real estate income. After expenses other than depreciation, let's say that figure is 10K. But, I have 30K of depreciation, so now that income *shows* -20K, even though there was a positive cash flow of about 1K per month.
So now we have 60K of K1 income -20K of 'rental loses' = 40K of taxable income. I just saved 3K of SE taxes.
Dan Dietz
No, you did not understand your tax guy correctly.
Rental losses offset your SE income only for income tax purposes. The SE tax is figured on your full SE income, BEFORE it is netted against rental losses.
You get income tax savings, but not SE tax savings
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Account Closed:
"For self employed people, you need to deduct your normal and necessary business expenses."
The IRS requires this, or banks?
I know IRS requires all income be declared but didn't think expenses too.
Yes, the IRS does require you to report correct taxable income - which involves BOTH income and expenses.
You might wonder why would the IRS want you to report expenses? Because, actually, in some situations you pay less taxes when you report less deductions. To avoid this pointless debate of when to report and when not to report, the law requires to report everything completely and accurately, every time. Income, expenses, and everything else. Weird, I know.
- Flipper/Rehabber · Hager City, WI · Member since 2018 · 22 posts · 10 votes7y@Mark Fries I second that... Mobile homes!
- La Vergne, TN · Member since 2016 · 93 posts · 28 votes7y@Exavier Hamilton Well said, thank you
- Investor · Grapevine, TX · Member since 2014 · 88 posts · 75 votes7y
I've been working in my s-corp for 11 years, issuing myself a W2. During that time I lowered my taxable income, but struggled to get loans, despite a very high credit score and plenty of savings.
Keeping entirely digital records and using an online accounting and payroll system made it much easier for me to quickly provide docs to underwriters.
Over the years, I kept and reused my "explanation letters" to underwriter questions about my business - it saved me a TON of work in subsequent applications.
Underwriters tend to give SE applicants a hard time, so when they did that to me, I researched underwriting rules on the Fannie Mae website and argued back and they would back down. The lesson is don't take underwriter word as the final word, learn the rules and argue back!!
Once I became a "seasoned investor" (2 years tax returns showing positive rental cashflow) lenders started counting the appraised rental income (on the property I was trying to buy) as qualified income, which helped.
After I did a cash-out refi on multiple properties, and opened lines of credit with credit unions, I started buying properties for cash. After every cash purchase and getting a tenant with a 1 year lease, lenders were easier to deal with for a "delayed financing" cash-out mortgage.
Most lenders target the simple primary-home buyer with a W2 job. Their underwriters know very little about SE business income. Working with an investor-friendly lender made all the difference in my experience, they know how to interpret the numbers in my favor and ask less questions.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes7y
Don't go get a job if you're doing well and have a track record. I was able to qualify for a lot of loans just showing my investment income alone. You may be tapped out of Fannie/Freddie type loans fairly quickly, but there are local banks and Credit unions that will lend, along with seller financing options as well.
- Lender · Los Angeles, CA · Member since 2018 · 95 posts · 16 votes7y@Selina Banda I appreciate the feedback.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes7y
Originally posted by @Rich Hupper:
@Matthew John Yes I think this is smart. Don't shy away from a good deal just because you need a cosigner. I am single so I do not have someone with w2 income who can cosign with me at the moment.
@Cody L. hahaha thats awesome. When you say commercial lending does this mean non recourse loans?
@Ken Nyczaj thank you for sharing.
@Alex Franks thanks alex
@Daniel Dietz Great point. I do not have any depreciation yet but soon hopefully I will
@Linda Weygant thank you for clearing that up. Definitely do not want to break any laws.
@Ryan Evans Thats great news for me I am going to keep plugging along.
@Aram V. right there with you. Looking forward to having an indepth convo with my accountant about my tax returns soon.
@Robert Vorhies I hear a lot of people talking about S corps but not C corps I will have to learn more about these.
@Matt M. I have 800+ credit and almost no bad debt. I have 3 successful flips under my belt and years of experience in the real estate industry. But conventional lenders do not care about any of that.
All they seem to care about is your net income on the schedule C form. Additionally I am not trying to buy a single family and live in it I am trying to get pre approved for cash out loans on future buy and hold projects. Every lender I have spoke with says my income is too low even though the debt coverage ratio is 1.2+ in my scenarios.
Commercial lending just means commercial lending. Some loans are recourse. Some are not. Most local bank loans are recourse. Most agency loans are not.
Unlike many, I find very little value in non recourse. If I can get 5% non recourse or 4.75 recourse, I’ll take recourse all day long. However I know investors who won’t take a recourse loan no matter what.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes7y
Originally posted by @Aram V.:
I'm in the middle of my 2nd year of Self-Employment and it's been a challenge. I claimed losses on my first year, unaware of how unattractive I'd be for a loan, DUH! So I'm collecting all my income and expenses and I'm being careful not to write off too much stuff.
Does anyone know what's a "good" percentage of positive net income that would be a attractive to banks on a tax return?
This is counter intuitive but I say “who cares”. Do everything you can to LEGALLY keep your stated income down and taxes low. If that’s means cheesy 1-4 fam lenders have to pass on you, so be it.
I have zero problems getting loans and get calls all the time asking for my business. They don’t give two dumps what’s my taxes say i make.
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y@David C. Haha, so funny on the amended tax return..
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y@Rich Hupper Getting a w2 is a whole different approach to life. I’ve been self employed for over 10 years as a general contractor with very short w2 experiences working for big construction companies. In w2, the sky is not the limit, there is no hustle at work (to make more per day) and you lose your immediate reward to taxes, which feels bad. ON THE OTHER HAND, W2’s ARE BEATING THE SYSTEM, WHICH IS ALWAYS A COMPETETIVE ADVANTAGE. ARE COSIGNERS A GOOD OPTION TO REFINANCE OUT OF A HARD MONEY LOAN? CAN WE BE JUST AS EFFECTIVE WITH A W2 COSIGNER? IT SOUNDS LIKE BRRRRR IS THE MAIN SYSTEM OBSESSED ABOUT HERE, AND I LOVE THE SOUND OF IT, BUT IS THERE ANOTHER SYSTEM THAT CAN BE A COMPETETIVE ADVANTAGE FOR THE SE? THERE WAS AN INDIAN (AMERICAN INDIAN :) GUY SHAREH OR SOMETHING LIKE THAT THAT WAS KILLING IT, BUT HAD 95% OF ALL PROPERTIES PAID FOR. HE WOULD FLIP TO GET CASH TO BUY AND USE CASH AS LEVERAGE TO CLOSE QUICK, INSTEAD OF HUNTING HML OR PRIVATE LENDER. I THINK FLIPPING FOR CASH AND BUILDING CASH THROUGH HUSTLE IN BUSINESS COULD BE THE MODEL I TRY. BUT THATS A GROUND UP MODEL WHERE YOU HAVE TO START WITH WHAT YOU GOT. SOUNDS LIKE SOME SE ARE BLESSED WITH GOOD LOCAL BANKS THAT WILL WORK WITH THEM, BUT SOME SE MIGHT NOT BE ABLE TO RELY ON A LOCAL BANK TO REFINANCE... IM TRYING TO FIGURE THIS STUFF OUT, SO THANKS FOR THE ALARM YOU JUST SOUNDED ON MY DREAMS OF BRRRRR AS SE. (SORRY FOR ALL CAPS, THE THING IS MESSED UP) ANY SUCCESS STORIES OF SELF EMPLOYED WHO SAVE/EARN/FLIP FOR CASH FOR ALL REI? BESIDES DAVE RAMSEY PLS.
- Investor · Omaha, NE · Member since 2015 · 366 posts · 184 votes7y@Rich Hupper I’ve been self employed for the past 12 years. I get business loans on my properties so it hasn’t really been an issue. Plus, I have heard that if you have been self employed with the same business for 10 years, it makes for a strong position.
- 7yRobert VorhiesPro MemberRental Property Investor · San Tan Valley, AZ · Member since 2018 · 29 posts · 3 votes@Rich Hupper If you are have losses with a company or it's brand new the s Corp is great because it's a pass through entity. Which means gains and losses from the company will go to you personal tax return. My friend has a s Corp and the company was making a lot of money that passed though to his personal tax return, he had to pay the IRS about $30,000.00. The best thing is to talk to your CPA and attorney for tax advise. I structured my company so I could have the company pay for medical insurance and other things to get the deduction, but that was per Affordable Care act. It just depends on what you need. The s and c corps are just tax structures.
- Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes7y
I'm I'm self-employed a broker/owner of my own real estate firm. It is harder to get loans when you're self-employed but as long as you have two years of steady income history it can be done. I recommend working with mortgage brokers because they are more flexible on this point.
I bought my first house as an investment with a chunk of my real estate income. There are tax benefits to investing in real estate when you are a realtor as you qualify as a real estate professional.
For the Op specifically I would recommend getting your broker's license as soon as possible and starting your own brokerage. Organize it as an S corp LLC and there are many tax benefits including being able to put aside a lot of money for retirement.
as far as vesting goes, I own some of my properties personally but I have established a living trust for estate-planning purposes. The others I own in LLC but it's really not necessary. I put it in an LLC simply because I had a partner at one point. it is much harder to get loans in an LLC name and generally just complicates matters.
- Member since 2018 · 10 posts · 2 votes7y
I wouldn't go back to a W2 job just for to get qualified for a loan. I've been a 1099 independent contractor for about a decade and though it's definitely tougher to qualify than someone who makes the same salary as a W2 employee, you can definitely get qualified by banks big and small. They do want to see that you have a certain number of years in your industry. They usually want to see your last two years of tax returns in lieu of W2s. Your net income is what they are looking at, so gross income minus expenses. The business expenses like mileage, meals and entertainment, travel expenses etc. are the tax benefits that W2 employees don't get to enjoy. On the flipside, those expenses also subtract from the amount of income that you show on your application, and therefore your DTI (Debt to income) which is usually the bottleneck in the process. Try to keep income high and expenses low. I would complete an application with a large bank and a community bank or mortgage broker. You will quickly learn where you stand.
- Member since 2018 · 8 posts · 3 votes7y
As an insurance agent who works with investors nationwide, I would strongly suggest finding a mentor in the space who has gone through everything you are about to face as you enter the RE world. Let them jumpstart your career by learning from their mistakes before you repeat them with your own (or worse, your investor's) money. I personally think the best mentor is Tim Bratz. Very hard working, smart guy, that made lots of early mistakes on his path to great success. Look him up on social media if interest. Last suggestion is surround yourself with professionals that commonly work in RE. From my experience, I would say 90% of the insurance policies that come to me have potentially catastrophic flaws for upstart investors. Reach out if you think this may be you!
- Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes7y
Originally posted by @Natalie Kolodij:
The correct answer to this is whatever the actual amount of income is.
Choosing to under report expense to inflate income is filing a fraudulent tax return and may also be mortgage fraud.
There are many ways to report expenses and filing in a manner that benefits long term goals is hardly fraud.
For example you can choose to ammortize or take the expense as a write off.
You can create an S corp and pay yourself as an employee
You can sock money away in a ROTH
These and many other options need to be discussed with a CPA
So suggest folks talk to a CPA and create a long term plan.
- Property Manager · Bend, OR · Member since 2018 · 14 posts · 4 votes7y
@Natalie Kolodij From what I recall they looked at my Gross Income for the last year, then averaged it out over 2 years.
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