Setting myself up to be lendable from flip/wholesale profits?

Question

Hey all, trying to setup business structure for 2019 to improve lend-ability/DTI in future years. This post is about improving lend-ability, not tax savings (which seems to be the topic on most LLC vs S corp threads I've found). Currently I have years of 1099 income I'm getting loans for rentals from, but I want to add to my income/improve DTI from flip/wholesale/creative real estate deal profits. SO a few questions for anyone willing to take the time to answer:

1. If I'm flipping/wholesaling and making $100k profit annually to my personal name/LLC, there's no way to use this capital gain/profit to improve my DTI. Fannie banks won't consider it reliable income. Do I have that right?

2. Does the above scenario change if I 1099 myself (not even sure that's possible)? So, LLC makes $100k, transfers to my accounts, 1099's me for the $100k at the end of the year, and I could then use that 1099 showing that income to get conventional loans? OR would bank see I own that entity and tell me that doesn't work?

3. Is the best way to turn flip profits into lendable income in Fannie's eyes is to have LLC that elects to be taxed as S corp pay me w2? There's no way to do something similar with normal LLC (via 1099)? Yes, I understand S corp could have tax advantages at a certain income threshold.

Summary: I want to ramp up flip and wholesale profits this year, but want to ensure that it turns into improved ability to get fannie loans/improved DTI in 2020. I've talked to accountant, he says go S corp for tax reasons if I can make $80k + flipping but talk to lenders about lending guidelines. I've asked lenders, they say S corp paying me w2 would be safe bet but haven't found clear answer on turning flips in LLC name into lendable income. To be clear, I don't know that I'll clear $100k flipping in 2019. I would like to give this a shot through LLC if I can 1099 myself, but only if banks would count that as income.

Thanks for any thoughts,

Basit Siddiqi · Answer

@Tucker Longregardless of how the income is earned(W-2 vs 1099) the lender if following fannie mae/Freddie Mac guidelines will require 2 years of income before they will issue you a loan.With that said - How are you acquiring the properties that you are flipping?If you already have income and are eligible to buy real estate; your DTI will not prevent you from acquiring a house if you are purchasing a cash-flow positive investment property. There does need to be a tenant in place with an active lease.

Stephanie P. · Answer

@tucker long

Give yourself a break and go with a no income verification loan. The truth is, many many underwriters won't get what @andrew postell is accurately telling you or their company has overlays that inhibit them and before you actually do find that underwriter/needle in the haystack you'll most certainly spin your wheels with a variety of lenders with the potential to drop your credit score after a monster amount of credit pulls.

Go no income verification; it's a little more expensive, A LOT easier and plays nice with LLC's and S Corp's.

Stephanie

Andrew Postell · Answer

@Tucker Long so with Fannie/Freddie whether you are LLC or W2'd, if you own the company, they will require 2 years of filed tax returns. That is their requirement. There are other loan types out there though - portfolio/commercial types of loans. Many investors use those loans with great success. Don't get me wrong, Fannie/Freddie will have better rates and terms but you can absolutely find permanent financing in other forms.

Tucker Long · Answer

@Andrew Postell, once again you come in with an unexpected answer. Much thanks! I'd rather not way two years to have this income working for me...So based on the context, your response, and my goal, would you recommend going the S corp rate and start W-2ing myself starting January? That should be lendable income once I have 2019 tax returns, correct?

Or is there another strategy you reccommend?

Andrew Postell · Answer

@Tucker Long this might be a pretty lengthy discussion so I'll try to be as brief as possible with this. True capital gains can ABSOLUTELY be used to qualify you for a Fannie/Freddie loan. You will need 2 years of doing it and that income will be averaged over that 2 years. BUT (and it's a pretty big but) you will have to show you will continue that income for the next 3 years. And with Fannie/Freddie loans it's all about documented proof. So with your Schedule B income from your notes we can prove those will continue with the note itself. The note will show when the loan will be completely paid off. If it's not paid off within the next 3 years, the interest can be used.

Capital Gains is a little more tricky. How can you prove with documentation you will sell more houses? Generally, it's easy to argue if you already own houses. So many investors who own several homes, and ALSO have capital gains, can easily prove this because "hey, I own houses that might be sold in the next few years". However, if you don't own any homes...it's pretty hard to "prove" it to Fannie/Freddie.

To 1099 yourself, you would still need 2 years. And I'm not sure how to structure an LLC to show capital gains as income. I did write a post on what Fannie/Freddie do allow on their tax returns HERE

Hope this helps in some way. Thanks!

Setting myself up to be lendable from flip/wholesale profits?

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