Self-Employed and Low Prices: Am I going to have to get creative?

[Blake Cormier]

Hi all! I'm just getting into REI and I'm looking to get my ducks in a row before just diving in. In doing my research, I've come across some potential snags that I wanted to get your advice on.

MY GOALS: Within the next 6-8 months, purchase a duplex or triplex to owner-occupy. Within the next 2-3 years, purchase 2 additional small multifamilies in the area possibly via BRRRR. Primary goal is cashflow

THE MARKET: Corning, NY, population 11,000. The rental market seems to be strong especially for well-equipped units. The city of Corning is definitely considered to be more upscale than Elmira (pop 30k) and the surrounding rural communities. Rents range from around $600 for a 1br in a C- complex to $1200 for a 2br in a nicely equipped townhouse community right downtown. I'd plan on targeting the $800-1000 market as far as finishes and amenities (off street parking, W/D in unit, etc.) not incl. utilities.

Home prices seem quite low especially in the areas zoned for small multifamily. Un-rehabbed duplexes are routinely seen on the MLS for sub-100k, and a move-in ready one can be had for $100-$150k. More on this later.

MY SITUATION: I am (mostly) self employed as a marketing consultant/copywriter. I say mostly because I have one client who pays me a monthly retainer on a W2 ($14k per year), while my largest client pays me the equivalent of $60k a year but not W2. I have another ~$10k a year coming in from other freelance gigs (also non-w2). I don't have many expenses so ~80% of this shows up as net income on my books.

Currently have $60k in savings and liquid investments (ETFs). We are very frugal and able to save more than 50% on average. FICO score is in the high 700s, though I've never had an installment loan, just CCs.

MY PROBLEMS/QUESTIONS:

I started my consulting business as a side gig about three years ago and just took it full time this past August/September, so while I have several years of Schedule C's for the same business, none of them are going to show my current full income just yet.

By the time we are ready to buy we will have plenty of cash saved up, but I don't want to invest $(all my money) in my first deal so I would rather finance or at least have a refi lined up quickly.

My question is: Given all these numbers, what would be the best strategy to get started with the househack? Should I buy a distressed property with cash or hard money and then try to refi into a conventional or FHA? Or is that going to be off the table with my income issues?

Would a non-QM loan be a better option? Will a broker even look twice at me if we're talking about such a small amount of money? (possibly sub-100k) Can I rehab+refi with that or would I be better off buying something more on the turnkey end of the spectrum? (Say $5k in mostly cosmetic stuff to value add).

Thanks in advance for any advice you have!

[G Brian Juk]

Corning is a great place to invest! 
how handy are you? And how much time can you devote to moving into a fixer upper and actually fix it up nicely to get the rents you’re looking for? It’s takes cash out of pocket to fix things up, and if the price difference is 75k between and dump and move-in condition, that’s 15k more on a down payment, but, you’d spend more than that out of pocket to fix it up, plus time. Do you want to be a handyman-or grow your business. Where will the larger return be?  You may find that putting a larger down payment for a move-in ready place is best for you and your family so you can devote more time to growing your business. You may not, I don’t know  

Talk to banks. CCU, ESB, first Heritage, Community and others. Tell them your plan and see what they need from you. Talk to all of the local banks. If you don’t talk to them, you have no plan. That’s my two cents. 

[Dan Weber]

If you can't get a normal residential loan given your work history, I would look to local lenders for commercial financing. Your interest rate won't be as good but it could still allow you to get into a place and then refi into a residential mortgage in 1-2 years when your tax returns prove your income.

[Amos Mainville]

Corning is a solid market to invest in and don't underestimate Elmira either. We have 8 doors in Elmira ND looking at 2 more soon. 

As a NY home inspector the main watchout in this area is being cautious and buying the right deal as that first property. Everyone has the fixr upper bug. Last year in buying 6 doors we evaluated 35 properties. Being in the early stage of our business I wanted properties that only needed light remodeling. No electric panel swaps (although I did one on 1 propeery) no foundation issues, no gutted properties. You will want something that can cashflow with minimal capital outlay.

Blaine Minor with Corning credit union has been fantastic to work with as has Gabe Rosettie for a lawyer. Realtor Lauren Groth has been excellent as well. Dont be afraid to change realtors if the first one isn't working. We had to change.

A commercial loan shouldn't be too concerned about your work status as they evaluate the property as the supporting business. Yes it costs a little more than a conventional but the numbers still work well.

The Corning duplex market dried up a bit going into winter but there will be more inventory this year. We saw a lot of downstate investors park cash up here through covid. They will sell eventually,  they always do.

With 60k in our market you could likely acquire 2 duplexes and have 10k to invest in each. Focus on building quality systems to reduce maintenance impacts. Look at water heater and furnace ages as well as electric panel size/type and wiring. I still see Federal Pacific and Challenger panels in buildings and I wouldn't let anyone I loved or hated sleep in the same building.

Dm me if you want to chat more. I love the local market and we invested heavily in it over the last 2 years. 

Amos Mainville

Chemung Valley Home Inspection LLC

[Blake Cormier]

Thank you all for your quick and detailed responses! Especially appreciate the perspective on rehabbing. I was already leaning away from that at least for our first property -- there will be plenty of time for that as we gain some experience.

Question on commercial lending: Is it available for owner-occupied properties, or will that depend on the lender? I imagine if only half the duplex is cash flowing that's going to hurt the numbers from the lender's point of view. I know for my own numbers I will run the deal as if I'm paying market rent, but I'm not sure how that works on the lender's side.

[Jason Wray]

Blake,

If you go with a bank/lender with no overlays they will use (2) years of a part time job. So being that you have (3) years and can show a current profit and loss and bank statements to illustrate your receivables/cash flow. You can use that income to qualify but I would advise filing your 2020 returns early if possible. If that options fails due to income/deductions DTI you can always just revert to a bank statement program. You will supply (24) months of bank statements they can use 60% of gross deposits divided by 24 months for income verification.

You also have the option to use a a debt service loan where they use the rental income of the current renters to qualify for the purchase. The current rent per month must be 115% greater than the proposed PITI payment on the purchase.