How do FI passive investors (Syndication LP’s) get loans?

Investor · CO HI CA, AL · Member since 2020 · 54 posts · 42 votes

As the title says, I’m trying to plan for the future and curious how this works. Ideally, if I’m invested in many different RE syndications that are using leverage (and doing cost segregation analyses), then my annual K-1’s will show a sizable loss even though I’m making money. If I convert my entire portfolio to passive investments in these syndications and no longer have a W-2 job but then want to buy a primary residence how could I get a loan? Wouldn’t the banks look at my taxes and say I don’t qualify because I don’t pay taxes and in their eyes don’t have any income?

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Randy Bloch

Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes

This is a real concern and can be a challenge for obtaining a traditional mortgage product in the US with the best rates. I have heard examples of people with 8 figure net worth being turned down.

1) if u have a larger Brokerage account u can get a asset backed loaned from like a Schwab or fidelity

2) go to small community bank credit union that will not sell the loan, they won’t be bound by the same underwriting guidelines of a traditional product. Rate might be a bit higher

3) with mortgage rates approaching 6% it becomes more compelling to pay cash.

4) private money lender, but probably not attractive rates.

5) in a bad market, seller financing could me option

For private real estate investment I think u can buy with cash, collect the rent for 1-2 years and then refinance with portfolio lender. They will lend based on properties financials and not your personal financial. Actually, u probably can do that with the initial purchase.

Quote from @Sean Barber:

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Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
4y
@Sean Barber just because you are getting refunds does not mean 'you are not paying taxes'. And research Full time REI investor if you have not.
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Randy Bloch
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
4y
This is a real concern and can be a challenge for obtaining a traditional mortgage product in the US with the best rates. I have heard examples of people with 8 figure net worth being turned down.

1) if u have a larger Brokerage account u can get a asset backed loaned from like a Schwab or fidelity

2) go to small community bank credit union that will not sell the loan, they won’t be bound by the same underwriting guidelines of a traditional product. Rate might be a bit higher

3) with mortgage rates approaching 6% it becomes more compelling to pay cash.

4) private money lender, but probably not attractive rates.

5) in a bad market, seller financing could me option

For private real estate investment I think u can buy with cash, collect the rent for 1-2 years and then refinance with portfolio lender. They will lend based on properties financials and not your personal financial. Actually, u probably can do that with the initial purchase.

Quote from @Sean Barber:

As the title says, I’m trying to plan for the future and curious how this works. Ideally, if I’m invested in many different RE syndications that are using leverage (and doing cost segregation analyses), then my annual K-1’s will show a sizable loss even though I’m making money. If I convert my entire portfolio to passive investments in these syndications and no longer have a W-2 job but then want to buy a primary residence how could I get a loan? Wouldn’t the banks look at my taxes and say I don’t qualify because I don’t pay taxes and in their eyes don’t have any income?

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Sean Barber
OP
Investor · CO HI CA, AL · Member since 2020 · 54 posts · 42 votes
4y
Quote from @Bjorn Ahlblad:

@Sean Barber just because you are getting refunds does not mean 'you are not paying taxes'. And research Full time REI investor if you have not.
LOL! Who said anything about refunds?
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Katherine Blazer
Lender · Tampa/St. Petersburg/Sarasota FL and Knoxville/Sevierville/Maryville, TN · Member since 2018 · 361 posts · 178 votes
4y
Bank statement loans are a great option for self-employed borrowers on their primary or second homes. They take what is being deposited in your bank each month and average it as your income. We do still need to look at your taxes but they do not play the same role.
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Randy Bloch
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
4y
what type of company offers these bank statement loans?

Quote from @Katherine Blazer:

Bank statement loans are a great option for self-employed borrowers on their primary or second homes. They take what is being deposited in your bank each month and average it as your income. We do still need to look at your taxes but they do not play the same role.

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Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
4y
@Sean Barber, additionally syndications should be willing to release the partnership returns, or a portion thereof, that can show breakdown of actual cashflow and depreciation. Many K-1s have this breakdown as well, especially if you are based in CA, where I don't believe you can take full depreciation available.
It will take more searching for a lender that understands what is happening, but there are some out there.
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Katherine Blazer
Lender · Tampa/St. Petersburg/Sarasota FL and Knoxville/Sevierville/Maryville, TN · Member since 2018 · 361 posts · 178 votes
4y
Quote from @Randy Bloch:

what type of company offers these bank statement loans?

Quote from @Katherine Blazer:

Bank statement loans are a great option for self-employed borrowers on their primary or second homes. They take what is being deposited in your bank each month and average it as your income. We do still need to look at your taxes but they do not play the same role.

You have a lot of options. We work with a handful of banks and shop all of them so the client is able to get the best rate and terms for their goals.
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Derrick Aragon
Investor · Portland, OR · Member since 2016 · 213 posts · 60 votes
4y
@Sean Barber they will pull back depreciation... they might want to see a tax return...
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Brock Mogensen
Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
4y
Sometimes banks will look at that way at first sight but if you explain the losses and provide a real estate owned schedule that usually satisfies their requirements.
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Sean Barber
OP
Investor · CO HI CA, AL · Member since 2020 · 54 posts · 42 votes
4y
Quote from @Brock Mogensen:

Sometimes banks will look at that way at first sight but if you explain the losses and provide a real estate owned schedule that usually satisfies their requirements.
If your wealth is held as an LP in syndications and not in personally owned buildings, what would you provide as a real estate owned schedule?
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y
@Sean Barber great question. This is certainly an unintended potentially negative consequence of investing in commercial real estate or other real estate that generates losses from depreciation. I spoke to a high up at Fannie Mae and they said "you can't have it both ways. If you're going to get these losses you're probably not going to get agency debt from Freddie Mac or Fannie Mae."
This is why it is important to develop great relationships with local bankers and credit unions. The smaller the bank the better. You will probably not get the same low rate and terms you would with agency debt but I would guess you will have some options. Especially if they see and can understand that your top line revenue is not reflected in your bottom line income. Good luck!
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
4y
If you want conventional financing, you have to have income to collateralize the loan. As @Paul Moore says, you can't have it both ways (with conventional financing).
You will either need to show steady income that a creditor can lend against, or turn to other loan products, like DSCR loans.
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y
Quote from @Scott Trench:

If you want conventional financing, you have to have income to collateralize the loan. As @Paul Moore says, you can't have it both ways (with conventional financing).
You will either need to show steady income that a creditor can lend against, or turn to other loan products, like DSCR loans.

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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y
Funny, right after I made this post, I got an opportunity to buy a large piece of land for our family to build a home on. It turns out that it had a few rental properties on it, so I went to my very small local lender. Though I would not be able to qualify for agency debt with my approximately zero income, due to paper losses, I was able to easily qualify for a commercial loan based on the value of the property since it had rental units on it. It pays to know a small local lender!
Podcast Guest on Show #533
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Sean Barber
OP
Investor · CO HI CA, AL · Member since 2020 · 54 posts · 42 votes
4y
Quote from @Paul Moore:

Funny, right after I made this post, I got an opportunity to buy a large piece of land for our family to build a home on. It turns out that it had a few rental properties on it, so I went to my very small local lender. Though I would not be able to qualify for agency debt with my approximately zero income, due to paper losses, I was able to easily qualify for a commercial loan based on the value of the property since it had rental units on it. It pays to know a small local lender!
This is good to know. Thanks for the helpful information.
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Sean Barber
OP
Investor · CO HI CA, AL · Member since 2020 · 54 posts · 42 votes
4y
Quote from @Scott Trench:

If you want conventional financing, you have to have income to collateralize the loan. As @Paul Moore says, you can't have it both ways (with conventional financing).
You will either need to show steady income that a creditor can lend against, or turn to other loan products, like DSCR loans.
This was my concern and reflects the fact that the government wants you to be employed in a w-2 job forever.
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