Blake Yarborough talks to us today about lending for self-employed investors. Learn more about offsetting costs and how little to no income being shown can affect you.
He shares information about various loan programs that are available for you.
Mike: Welcome back to the Flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons that take your business to the next level. And now let’s meet today’s expert host.
Blake: Hello, this is Blake Yarborough. I’m today’s host for the REI Classroom. Today, I’ll be talking about investor lending for the self-employed.
Mike: This show is sponsored by PassiveRental.com.
Blake: My financing has been concentrated on investors for the last 10 years, and I see common things happen over and over again. Most commonly, people, they don’t believe they can buy investment property. The great thing about investment properties is they pay for themselves. But on the other side of the coin, if we’re not showing enough money in taxes, then we may not always have the best loan programs, but I’m here to tell you there are other loan programs out there for you.
On that topic, a lot of times people say, “I’m self-employed, so I don’t show any income.” Well, that’s fine. You may be being overly-aggressive on filing your tax returns, but be aware that’s affecting you if you really want to be a successful real estate investor. And when I’m talking about this, I’m talking about truly self-employed borrowers or else people that are 1099. They both fall into the same trap because they have a lot of write-offs.
If you’re self-employed, you have . . . for instance, myself. There’s a lot of items that I can write off as capitalized expenses that you take a depreciation over time versus year one true losses. Depreciation is one of the biggest write-offs people use in real estate investing and their tax returns. The thing with depreciation, if the house is in your personal name, we can clearly add it straight back. We can add back depreciation.
There’s other things that we need to watch out for to people, especially people that are 1099, is called 2106, unreimbursed expenses. That’s one of the gotchas that we see a lot of times in people’s tax returns. Everything looks fine, but they might have $3,000, $5,000, $7,000, $20,000 in unreimbursed expenses from their employer, and we have to take that straight off their total income, and that could cause issue in their underwriting.
In general, when people are talking to me about buying investment properties, they’re afraid that they can’t afford to because their debt ratios are just enough to get by. They’re 45%, 50%. They’re paying their own bills. But as I said a minute ago, the great thing about real estate investment when we’re getting financing, for instance on a conventional loan, we can use 75% of gross rents to offset the payment.
For instance, if you have a let’s say a round number, say $75,000, house and your payment with principle, interest, taxes and insurance, and technically HOA is $750, but you rent it our for $1,000, we can use $750, 75% of the $1,000, which is $750, to offset the $750 payment, which is 0 net effect on your debt ratio. And that’s one of the main points I’m going to talk about here and get across to people. So these people that are just paying their bills and just debt ratio-ing on their own, they’re qualified to buy a primary residence, and that’s something else.
If you qualify to buy a primary residence, usually we can get you an investment property loan. They think they can’t buy investment property, but they do. And then they can buy another one, and they could buy another one, and they could buy another one, because once again, if you buy it right, where the cashflow offsets, 75% of the rental amount, offsets the payment, then 0 debt effect on your debt ratio.
There’s other issues where you have people that truly don’t show any income. They don’t. This is where credit and liquidity comes in former. You got your income’s important. Your credit is your credibility and your willingness to repay, and you look at liquidity, cash. That’s your safety margin for lenders. That way if something goes vacant or something goes wrong with the property, and that’s why on investment property, they typically make you put a larger down payment. But I don’t like to put 20%, 25% down payment every time I buy a house, obviously, and I don’t care who you are, you’re going to go broke sooner or later if you’re doing that.
And we’ll come back to that, and I’m sure most of y’all know what I’m talking about when I say that, is buy it with private money or a hard money loan. And at Capital Concepts, we call it a smart money loan, which you’ll finance 75% after your value and you’ll simply refinance and do a conventional loan or some of these bank portfolio or some of these other kinds of loan programs depending on your situation.
But getting back to it, the people that don’t show really any money on their tax returns, that zero everything out the best they can so they don’t have to pay Uncle Sam any money, when you’re buying investment properties, it’s going to cost you. You’re going to be paying the lender a little bit extra money. And if you still choose to do that, that’s fine, but let’s talk about it.
There are your credit. First of all, let’s start with credit. You need to have at a minimum 680 credit score. I mean, we can do things a little bit lower, but there’s substantial adjustments and shrinkage of the available people that are willing to loan you if you have less than 680 score.
I had a banker tell me anything under 700 raises an eyebrow for them when we’re doing a portfolio loan. There are stated income loans, truly stated income loans, and they’re just basically lending it on your credit like the loans we were doing eight or nine years ago, but they’ve got extra guidelines to make it a little tougher than they did.
Bank statement loans, 12 months and 24 months bank statement loans. Typically, once again, putting at least 20%, 25% down, sometimes more, but that’s available. And then another thing that’s come out in probably the last two years or so that’s getting a little bit more momentum, it’s properties that are truly lending on the debt service of the property. Different lending companies, they either want 1.25%. So if your payment’s $1,000 they want you to be at $1,250 a month rent, or if your payment’s $1,000, some want you to have $1,350 a month rent, because they’re not lending on your income.
They want to make sure that the properties are debt servicing plenty for their own security and safety and the property not gone into default. Now, the downside is when we’re going to these niche lenders that aren’t conventional, conventional has no seasoning requirement. Seasoning means how long you own the property before you could refi. Conventional loans is a standard mortgage. Everybody knows there is no seasoning requirement.
We can go straight from our private money, hard money loan or into that type of loan with no hesitation. Well, some portfolio loans, local bank loans, and maybe some securitized loans and other types of loans like that, sometimes they give you a hard time about doing immediate refi and acknowledging all this equity that you got by buying it right and fixing it right. But the way around that is . . . so some people don’t want to give you that immediately.
They might want you to own it a year, or some people even more, but if we’re doing a blanket mortgage, which is one mortgage covering multiple properties, and if you got one brand new one and one you’ve owned for a little bit of time, they’ll take that into account. They’re like, “Okay.” They’ll make an exception, or in many cases, they’ll let you go ahead and close on those. I just wanted to bring up some of these issues and talk about them. There’s usually a way to get this thing done.
It’s just knowing where to kick, and since I’m an investor myself and been an investor avidly for about eight years, I’ve met many of these lenders. And since I’ve been a lender for 18 years, I now know where to kick. I know where to send these loans because I paid attention and I have plenty of clients that are in these situations. So once again, I’m Blake Yarborough with Capital Concepts. Come see us at 4SmartMoney.com, that’s number four, SmartMoney.com, or give us a call at 877-651-9500, and thanks for sitting in.
Mike: PassiveRental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit PassiveRental.com to learn how to purchase cash-flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting PassiveRental.com.
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