Financing for full time investors

42 Replies

Hello everyone.

I'm a newbie on this forum and very interested in learning more.

I have 2 questions:

- Are you a full time real estate investor?

- If so, how do you get financing?

I am going that direction in a few months and wanting to know if we can still buy more invesment properties with that thing called paystub and W2.


Would appreciate feedback.


Thank you!

Fulltimer

I have about 5 years of good tax returns with rental income. Each year showing a growth in rental income. It is kind of interesting see my W2 income decrease and the rental income increase. 2013 is my last year for a w2. I'm not expecting or wanting a w2 ever again.

I'm in the process of refinancing some portfolio loans into a commercial loan. Not once have they asked me for a w2 or why I left my J O B last year. A year ago things might be different. The timing of leaving your job has to be right.

Don't expect to leave a job and think the lenders will hand you loans unless you have some sources of consistant cashflow, not cash sitting in a banks.

Do you have a portfolio already started or?

[email protected] | CA Agent # 01957844

I meant to say that depending on the type of loan your looking for I think there will always be a product and service if you find an opportunity.

[email protected] | CA Agent # 01957844

Hello @Joanna L. ,

1. While I am not a full time investor, I am an investor friendly Realtor and believe I can provide some insight on your question.

2. A. Your first route of financing, and usually the cheapest in today's market, is through traditional bank financing. Currently, you can have up to 4 loans through a traditional bank (Regular bank or Credit Union). So if you have a decent paying job this is the best way to start. Regardless of the number of loans you have, the dollar amount being borrowed will have to follow a certain debt to income ratio. Right now, I believe the maximum debt to income ratio is 45%. If you go over this number, you will most likely have to increase your down payment/equity in an investment property.

2. B. Loans 5+ will most likely need to be portfolio loans. These are loans that the bank must hold instead of sell off in packages so the interest rate on these loans are usually higher.

Personally, My father and I currently own one house that is a seller carry, 3 homes that are conventional loans and 1 house that we are buying all cash.

The house that we are buying all cash is coming from several private investors. I've made deals with these private investors that they will receive a portion of the profits based upon the amount of money that they put into the deal and that I will earn a percentage based upon how much work is involved in finding, fixing and selling the house. If it is a buy and hold instead of a flip, then we use the same calculations for the cash flow and appreciation.

I hope this helped!

Medium empire investment group logoDavid Friedman, Empire Investment Group | [email protected] | (909) 486‑2957 | http://www.realicore.com

One more thing I forgot to add.

Banks will only start to count rental income and commissions as a usable source after 3 years of cash flow or receiving commissions. This is my experience at least.

Medium empire investment group logoDavid Friedman, Empire Investment Group | [email protected] | (909) 486‑2957 | http://www.realicore.com

If you know some people with money (or could get to know some) you can offer them something like 7-10% interest to finance your deals. Or if you have some money to put down, you can just go straight to a bank.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Originally posted by @Frank Romine :
Fulltimer

I have about 5 years of good tax returns with rental income. Each year showing a growth in rental income. It is kind of interesting see my W2 income decrease and the rental income increase. 2013 is my last year for a w2. I'm not expecting or wanting a w2 ever again.

I'm in the process of refinancing some portfolio loans into a commercial loan. Not once have they asked me for a w2 or why I left my J O B last year. A year ago things might be different. The timing of leaving your job has to be right.

Don't expect to leave a job and think the lenders will hand you loans unless you have some sources of consistant cashflow, not cash sitting in a banks.

Do you have a portfolio already started or?

Oh wow this system is confusing - how come they don't provide 'reply' button for each response?

Anyway, looks like I should be able to tag each one of you, but I don't know how to do that just yet, so I"ll just put my answers and questions below:

Frank R.: Do you have a portfolio already started or?

Yes, although not enough since we're in SF bay area and houses are extremely expensive here. We do make great profit mostly from short terms, but will change that now with SF City putting more restrictions for homeowners. Crazy city, I'm telling you.

I'm thinking about buying at least one more in SJ since the city is not as crazy as SF, but I only have a few months worth of paystubs now. And not sure I want to stay longer just to get more.


@David Friedman

Ha. I just learned how to tag :)

Banks will only start to count rental income and commissions as a usable source after 3 years of cash flow or receiving commissions. This is my experience at least.


Not sure what you meant by 'receiving commissions'? Or this is more for real estate agents?


And with this said, when I have a significant gain on Schedule E, where does the profit go, do you know? Am I getting taxed on that?

@Joanna L.

Yes, I should have specified. I am a real estate agent and therefore my income doesn't start to count until after 3 years do to the fluctuating nature of real estate commissions.

I am not a CPA nor to I pretend to be one, but from my experience you will not see large gains when starting out. Especially when you can depreciate the value of the property over 10 years. So, it is even possible that with the depreciation expense subtracted from your rental income you are running at a "loss" on paper, meaning low or no taxes. Again, not a CPA, but this is from my experience.

I hope this answered your question. If not please help me by clarifying :D

Medium empire investment group logoDavid Friedman, Empire Investment Group | [email protected] | (909) 486‑2957 | http://www.realicore.com

@Joanna L. Short answer is yes, you will be taxed for real estate income and appreciation. There are a number of practices that can help defer taxes or help get preferential rates, but real estate has been bought and sold for at least a few thousand years before anyone thought of the United States or the IRS, so it's fairly well understood and they generally will make sure that tax is paid on income earned in this space.

You'll want to figure taxes into your planning- the way you structure your business may help or hinder you through when the income/appreciation is recognized. It will also effect how much you are personally on the hook if something goes badly. The nice thing is that starting out, you generally don't have much to take and the taxes are relatively small. Having said that, it still might be a good idea to spend a few minutes and some money with a CPA and/or attorney setting things up and identifying the tax effects of your exit strategies to try to keep capital deployed before handing it over to the government.

Yes, I'm an accountant, but I'm not YOUR accountant. This advice is provided for general, informational purposes. By using it, you agree to limit my liability to what you paid for it (that would be $0, btw). Have a nice day.

Thanks, @Bryce Christensen !

So both my husband and I were working full time last year. He quit his job end of last year and I will quit mine in a few months. When we met with our new CPA a few weeks ago, she said in our 2015 tax report we will be considered 'unemployed with no income' as all the rentals income will be on Schedule E.

But looking at the numbers, we are actually doing quite well and in case we are still up even after the depreciation, I wonder if we will be taxed for that gain and for how much.

@David Friedman Fannie/Freddie will do up to 10 loans through conventional financing:

Loans 1-4 : 25% DP - 680 Min Score. Ability to get a HELOC or cash out refi

Loans 5 - 10: 30% DP - 720 Min Score - No cash out refi or HELOC

They also need 2 full years of tax returns to count rental income. But with reserves this can be "bent" I was able to count mine after 1 year

@Joanna L. - I am *hopefully* becoming a FT REI in the next few months. What has allowed us to acquire over $1M in property so far was our W-2 income and good credit. We built the business up enough to move us into the commercial lending space. Now that we are doing deals there once we get a few closed and are confident that will be a open door for us then we will be able to drop our W-2

Medium second city real estate logo   white close upBrie Schmidt, Second City Real Estate | [email protected] | http://www.SecondCity-RE.com | IL Agent # 471.018287, WI Agent # 57846-90 | Podcast Guest on Show #132

@Joanna L. Your CPA was probably referring to the effects of unestablished income on your credit. Schedule E income is still taxed in the year earned, unless you lock it up in a corporate entity (C-Corp, S-Corp, or Corp-LLC*).

There are other effects of using a corporate structure- some deductions which are capped for individuals (like depreciation, which cannot exceed income less all other expenses) but are not capped for corporations, so there are also times when such a structure is appropriate to capture those tax effects. There are also benefits (like the avoidance of taxation of long term gains on the taxpayer's primary residence) that are denied corporate structures, so choosing the right one for a particular scenario can be important.

*Corp-LLC- LLC that has elected to be taxed as a corporation, which involves the corporation recognizing income in the year it occurs, but the investor personally recognizing income in the year the corporate entity distributes it. Yes, income gets taxed both times, although the second time is at a preferential rate.

See the disclaimer in the earlier post. Let's save the planet by reducing digital waste. ;)

Wait..once I have 5 loans I can't cash out anymore ? I've never heard about this before

At 5 loans wouldn't you be able to get a blanket commercial loan for all 5 properties? I suppose you could cash out like that if that is the case.

Medium empire investment group logoDavid Friedman, Empire Investment Group | [email protected] | (909) 486‑2957 | http://www.realicore.com

Wow, what banks do you guys get loans from? I'm pulling teeth with citibank right now.

Originally posted by @Justin F. :
Wait..once I have 5 loans I can't cash out anymore ? I've never heard about this before

For conventional financing, you can cash out refi up to four loans. Five and above you cannot cash out is what I have heard but you can go up to 20 loans with FannieMae. You may purchase a cash and cash out within six months, but I have heard that is difficult as well after four loans. It is possible to get a commercial loan and refinance on commercial terms, 3-5-7 year term with 15-20-25 year amortization, 30 if you're lucky. Commercial loans from portfolio lenders will base the ability to repay mostly from your rental property. You will need enough cash flow to cover your debt service at 1.2 times or higher.

Originally posted by @Joanna L. :
Wow, what banks do you guys get loans from? I'm pulling teeth with citibank right now.

I'm not sure how many existing loans you have, but I would work with another lender or a mortgage broker if its SFH and you have four loans or less as big banks are sometimes hard to deal with. If you want a commercial loan, I would speak with a local lender, a small bank that can provide a portfolio loan. If these properties are in your name, you should contact credit unions as well.

@Johnson H. Thanks! I learned lots in my very brief time joining this forum.

Had no idea that big banks are harder to deal with. This is for a newly converted condo in a 3 unit building. Guess too late for this one now since my 2 co-owners are ready to sign and I'm still being left hanging by Citi.

BTW, does anyone know how to just use last name initial instead of complete name? I didn't see anyway to edit.

If you go to the mortgage section of zillow.com, you can find lots of mortgage lenders. Also, if you go to the real estate section of SFgate.com, there are many positive mortgage stories.

To show only the initial of your last name, go to your account page, then profile, change settings on the left hand side, privacy tab, and click "Hide my last name"