Lets hear from the self employed

Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes

On this forum ive noticed a good chunk of people have w2 income who are investing for the first time or becoming seasoned investors almost ready to give up their w2 job.

It seems like it is easier to get started in the rei world if you have w2 income.

Can any of the 100% self employed people share their experiences? What lenders gave you loans?. What challanges did you face applying for loans? were you a single member llc or sole proprietor or some other entity? What other creative strategies got you into your first house or investment property?

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Chris MasonPro Member

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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

Originally 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.

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Mary M.:

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.
Hey Mary
I actually own a tax firm.
I'm just saying that everyone on here who just wants to leave off expenses- is committing tax fraud.
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
@Natalie Kolodij:

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Account Closed
Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
7y
@Natalie Kolodij
Good to know leaving off expenses is tax fraud.
Tax experts seem to agree all income should be declared, but sometimes disagree on expenses. If two tax professionals disagree should I go with the one that advises taking a deduction so as to avoid possible accusations of tax fraud?
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Paul DefnginPro Member
Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
7y
Originally posted by @Matt M.:
@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.
If you’re looking to buy a residential investment property, there are mortgage program available that allows you to qualify based on rental analysis to determine property cash flow. Personal income is not required to qualify. That said you will be subject to higher interest rates, costs, and higher down payment, than the standard conventional loans but it is possible. These are not Hard Money Loans.
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Aram V.
Miami, FL · Member since 2017 · 64 posts · 13 votes
7y
Originally posted by @Paul Defngin:

Originally posted by @Matt M.:
@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.
If you’re looking to buy a residential investment property, there are mortgage program available that allows you to qualify based on rental analysis to determine property cash flow. Personal income is not required to qualify. That said you will be subject to higher interest rates, costs, and higher down payment, than the standard conventional loans but it is possible. These are not Hard Money Loans.
Hi Paul , what lenders who do you recommend that have this type of cash flow mortgage program?
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Paul DefnginPro Member
Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
7y
Hi @Aram V.we can do these type of loans if you're buying in PA, FL, DC, VA, MD, DE. I'm personally licensed in these States. We have other MLO's also licensed in WV, NC, GA, and NJ if the property is in of these latter States. We do have a minimum loan amount of $75,000 or more. 20% Down. Must have minimum credit scores 660. No personal income used. No Tax Returns. Again, this is strictly for investors and you will be subject to higher rates than the regular conventional loans.
It’s another available awesome tool in your toolbox, IF the numbers work for your specific situation.
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