Mortgage Advice - Self Employed

[David W.]

Hello! 

So my goal is to purchase an investment property (either can use as my primary residence or investment property) and have been looking from SFR up to multi-units under $800k, but every time I calculate higher rates with doc loans 6%+, which doesn't make financial sense as the rate squashes any profit margin.

I called around to different loan officers I found online but am left relatively confused on which way to proceed. Was wondering if anyone can point me in the right direction on which would be the best type of loan? 

Single
Owner of 1 single family residence $750k and owe $500k
Have $130k liquid
FICO 790
No debt, no loans, own car, credit cards at zero
Self-employed and business grosses $230k but I write off everything so show about $60k net

Looking at properties in Los Angeles, Memphis, and Columbus. 

The last question is, is it better to buy smaller value properties rather than 1 property?

[Andrew Postell]

@David W. there's a lot here but this is a common area for a lot of self-employed people so I'll try to tackle this one area at a time:

Buying Lower - for most investors we target properties that need work. Then we buy them at a deep discount. If your rate is squashing your profit...then you need to buy lower. That's it. Sure, you can put more money in to have your loan be lower but that will eat up your cash. Most investors target 70%. Meaning buying a property, renovating it at 70% of the ARV. Maybe 75% ARV. That way you have the equity built in to hold a 20 year loan or higher rate type of thing.

Tax Returns - Fannie Mae and Freddie Mac are conventional, conforming loans. They do a large percentage of the home loans in America. They follow a calculation method that VA, FHA, and USDA loans use as well when calculating income from self-employed businesses. I'm not sure of the total % of loans that these loans represent in the US but it certainly represents the majority. I am saying this because if we get money from them…we play by their rules. Their money, their rules. And below are the rules that they follow when calculating income for a Schedule C business. I don't know if there is opportunity for improvement on your 2016 or 2017 taxes but maybe we can plan for 2018.

Here's the Scoop:

The calculation begins by taking “Line 41 – Net Profit” and then ADDING the following back to that figure:

• Depletion (line 12)
• Depreciation (line 13)
• Business Use of Home (line 30)
• Business Miles…if logged in page 2, part IV (line 44a)
• Amortization/Casualty loss (page 2, part V)

So each of those deductions can LOWER your tax burden to the IRS while being ADDED BACK to your qualifying income for a loan. If you have those deductions, then take those EVERY time.  Maybe by focusing on those deductions your $60k will look more like $80k or something.

The 1% Rule - the 1% rule is whatever you buy and rehab at, your rent needs to be 1% of that total figure.  This helps keep you in the green.  In general, the more expensive the home, the further away from 1% you get.  If you buy a property for $20,000...you aren't renting it for $200...you rent it for something like $600.  But your expense ratio is higher for smaller homes (replacing a door costs the same no matter how expensive the home is).  So it all has it's pros and cons but usually smaller value homes cash flow better.  Where I am, we target homes below $160,000 for this reason.  The threshold might be totally different where you are but just keep that 1% rule in mind.

Hope this helps in some way. Thanks!