Self employed loans?

Question

Hello fellow BP'ers, Both my partner and I are self employed in the horse racing business. We can't provide any W2's or a proof of monthly income due to the fact that our earnings are based of off race outcomes which vary every week. Between the both of us our 1099's over the past two years are show earnings of close to $570 combined (him $375K, me $195K) My credit is bad though due to a foreclosure in 2012 (I was young and dumb) his is in the 700's. We also have a third partner who shows a monthly income of $6500 with a credit score in the 700's as well. We have $50K set aside to invest. We want to invest in the DFW area using the brrrr strategy. My question is, what options do we have to apply for a loan, and which loan would you recommend? I imagine I'll have to be a silent partner. So should we go FHA, conventional, or look for a hard money lender?

Diana Muresan · Answer

Hi Ryne, I am a horse person myself, we have about 100 Lipizzan horses here in Chicago area, no racing though, just dressage..... In regards to you dilemma, i would need to see your tax returns, banks do not use 1099 income to qualify, also, what is the type of the business listed on your returns, it might pass the radar without investigating. If you have been self employed for over 5 years, 1 year of tax returns will suffice. The fact that you had a foreclosure in 2012, I would not worry about it, you can do an FHA loan if foreclosure is less than 7 years, but then you will need 2 years of tax returns though, if you wait until you have 7 years since foreclosure then you can go conventional with only 1 year of taxes. What kind of property are you looking to purchase, multi-units or single family?Based on your downpayment, if worse case income is not enough, with 20% downpayment you can do a loan DCR (debt service coverage) where we use rental income only to qualify, or you can do a No Ratio program, where we don't calculate your debt to your income, or, you can do a 12 mo bank deposits average as your income, there are quite a few options and these are not hard money lending, there are non-agency productsCheers

Shaun Weekes · Answer

It sounds like your earnings are gambling earnings so I would strongly recommend opening up an llc or Corp and pay yourself a k-1 income. This way you can show a steady stream of money. It would take forever to explain all the details so call your cpa. They will set this up for you and explain how it all works. After showing this structure for 2 years you'll be good to go with FHA and conventional since your FC will be 7 years in 2019. FHA is only a 3 year waiting period so that is good.In the mean time private money or hard money is going to be the way to go.

Chris Mason · Answer

That's way too broad a generalization. Anyone thinking of giving themselves a paystub and a W2 in 3 months thinking that will solve everything, think again. Fannie Mae knows dang well that any dummy can google search "blank w2 pdf" and fill in the blanks. 2006 was a long time ago.

Stephanie P. · Answer

Ryne V.Before I go any further, congratulations on your winnings! I own an off the track thoroughbred and love him. He's been converted to a hunter jumper and does some dressage (although he hates dressage).PM me for details of your strategy, but as the guys are saying, your best bet is to go with a fix and flip loan up front (10-20% down based on the purchase price and then the rehab money is funded 100% into an escrow hold back account). Then, after the renovation, you decide whether to keep it and refinance out of it or sell it and pay back the original lender.Best of luck,Stephanie

George Despotopoulos · Answer

You got it! Feel free to call or private message with any questions.

George Despotopoulos · Answer

Hey Ryne, there's lenders in the space b/w hard money and conventional; for lack of a better term we can call them specialty lenders or even private lenders. Lending to an LLC is possible but it will require anyone with 25% or more ownership interest to be a personal guarantor. This means that whoever is a personal guarantor will have their credit pulled, provide an assets & liabilities statement, and undergo a routine background check. If you own less than this then you may not be subject to underwriting which is good as your foreclosure and low credit score won't impact things. You have two options. One is buy the property outright using longer term financing from a private/specialty lender, the rates generally will be around 7%-9.5% and the origination fee anywhere from 1.5-2.5% at closing. You would have to go high enough in LTV to cover the rehab costs. Note, that these typically have prepayment penalties. I would do a rental property loan, unless your team feels the rehab portion is significant and that you can obtain much higher rates with that rehab. If that's the case, then you can get a bridge loan (hard money), which is tailored for BRRRR. Rates will be 10% - 13% and should not carry a prepyament penalty as it's only a 12 month term. Once you finish renovations and you get higher rents in place, you should be able to refinance into longer term loan at a lower rate.

James Miller · Answer

It would be a legitimate W2 regardless of whether the employee was also an owner. In my experience as a lawyer working these deals, a “self employed” person who takes a W2 seems to get better treatment than one who has no W2. Does that make sense? No. But that is the reality I see lately.

James Miller · Answer

You may want to speak with an accountant about whether an entity taxed as an S-Corp would work in your situation. In my experience, if lenders see a W-2, *even if you're the sole owner of the 'employer'* they count that as higher quality income than SE income.

Rick Momsen · Answer

Go portfolio lending and the 2012 foreclosure won't be an issue though you may get a slight hit on rate because of it.

Josh Collins · Answer

@Ryne V. - I like @Shaun Weekes 's suggestion of starting a business asap and starting to pay yourself some sort of regular income (whether it be a W2 or K-1). I think that will help create legitimacy to your credit/finances going forward. For this deal it seems ripe for a hard money loan in the "traditional" Bigger Pockets theme. Get a hard money loan, use your cash reserves for the rehab, get it rented up and then refinance out your money and the lender's money. Repeat. Obviously you're going to have a find a good enough deal that a hard money lender is going to want to partner on, but I think that will serve as a sufficient "guideline" for your first deal anyway. You don't want your margins too tight on the first deal anyhow. Another option is a house hack where your friend buys a 4 plex, lives in it and rents out the other 3 units. That may seem a little "out there" for this thread but I'm guessing you'll/he'll need to live somewhere and this would allow you to save up for the next deal even faster. Then after the 2 year seasoning period, you can move out and rent out the whole building. Onward and upward. I like this option for the first $50k as you'll need a place to live and you'll probably still need a job. I don't think you'll "retire" on an investment of $50k into something (but I could be wrong) anyway.