How to Get a Loan When You Freelance

Question

I'm new to real estate and am working through my initial education phase.

My first goal is to purchase 5 rental properties because I love recurring income and believe that this strategy is best suited for my goals and personality.

I'm still a ways off from going through my first deal, but as I prepare, I have a question about financing that I think I need to start addressing now...

I freelance for a living and I think that this may make it more difficult for me to get a loan since I don't have a "stable income."

First - is this true or am I making it up?

Second - If it is true, what steps should I start taking to increase my chances of getting financing when the time rolls around for my first purchase?

Thanks!

Stephanie Dupuis · Answer

Hi Pat -

Self-employed musician here, also. I've had no problem getting loans. Here's what I do:

I ask all payment be paid to my S Corp (btw, go see a CPA and see if it's best to become an entity - if so, have as much income as possible paid to the entity, not to you). I deposit all cash payments to the corp.

I record all income. ALL income. This gives you credibility to your lender - and makes you look stable to the bank. My lender works hard for me and I now have flexibility.

Deposit all income into your bank account so you have a record of deposits. Especially the two months prior to applying for a loan and until closing on a property. Make your bank account look big.

Watch all expenses - I don't spend money unless I need to.

Also, as stated earlier - meet with a lender and ask them what you need to do. I'd meet with both a CPA and a lender. Not all CPA's are created equal. I'd go to a REI meeting and get some referrals (don't do what I did which was interview every CPA in town until you find one - this took f-o-r-e-v-e-r and I ended up with the CPA most REI guys and attys. use). You've found your CPA when you tell them that taxes are eating up what you make (b/c they are, btw) and the CPA knows how to reduce them significantly and legally.

Tom S. · Answer

Pat M. - you should also explore owner finance deals.  Save some money for a downpayment, look for motivated sellers, and of course make sure all the numbers work.  I did a number of owner finance deals back when I was doing some free lance consulting work.  No banks!

Good luck,

- Tom

Jean Bolger · Answer

Hi Pat! I'm a self employed musician as well. Yes, it will be really really frustrating to work with banks and lenders who hear "musician" and think you spend all day on the couch smoking dope. But enough venting!

You WILL have to present two years tax returns every time you turn around.  Just keep that in mind when you're doing your taxes. Report everything, even the gigs that don't send 1099s, and don't get too enthusiastic with your deductions. It will be worth more to you in the end than any tax savings now.

Other than that, when you get to the point on talking to lenders, try to present yourself to them as a business person (which you are, after all). In my own career I have played a lot of music, sure. But I also do contract negotiations, marketing, operations and project management, logistics, web development, advertising, bookeeping and public relations. Think about all the things you do, and see if you can turn it into compelling info to include with a loan application package.

BTW, I think you're doing exactly the right thing. Twenty years from now you'll be playing the gigs you want to play- not the gigs you have to play- and you won't be sweating about your future the way the other guys are....

Jimmy Moncrief · Answer

Pat M. It depends on what type of financing you are pursuing.  If its a government sponsored mortgage (FHA, FNMA) yes very hard.

If it's an investment loan with a community bank, significantly easier.

Tell them to focus on your Schedule C cash flow.  Provide supporting financial statements and bank statements.

Also, call at least 3 different banks and ask them what type of loans you are looking for so you don't waster your time when you get a property under contract.

Pat McLaughlin · Answer

Thanks for the input John Fossetti and Dion DePaoli!

Looks like I will have my work cut out for me as I am a freelance musician and I took decrease in earned wages this past year when I moved states.

Are there other avenues of getting capital that would be better suited for my situation?

Dion DePaoli · Answer

Define what industry you actually freelance in, for better answers.

Freelance = Self Employed

The industry will help fill in some of the options you have, if any to prove your income.

There are loan programs which offer alternate and reduced income documentation.  However, the occupation still matters.  Saying you are freelance artist will likely not get anyone to believe you make $100k a year.  Being a freelance mobile application developer might.

Your idea of "stable" is likely not the same idea as underwriting.  Stable income is the continuity of income into the future.  You can have stable income and only work one month a year or a couple weeks a year.  Your income will be reviewed for the last two years.  It is not an average of the two years per se, as usually wages increase into the future.  A downtrend though, would not be favorable.

In addition, how you deal with your personal taxes will also affect this.  You can freelance and still pay yourself a salary to some extent.  If you run the income through an LLC, the LLC could actually W-2 a portion of your salary which would be sufficient documentation but we don't know if the income would be sufficient.  Running it all through your own bank account or as a natural person is fine, but then how you treat your business expenses as a reduction of your income will matter.

John Fossetti · Answer

Hello Pat, I am a former loan originator, started in 2002, I know a lot has changed so I will disclaim to seek a Loan specialist. LOL..

Now that I have disclaimed that, most people who are self employed need to have 2 years of Tax returns (sometimes 3) and most likely a year to date P&L.  They will average your Net Income over the past 2 or 3 years and that would be how they determine your ratios (Debt to Income).

Depending on your strategy, you may want to purchase your properties in an LLC,  or another entity.  They will most likely want you to sign personally and have your entity as a single member (which I don't recommend) until your entity has 2 years of steady income.

The best bet is to build a relationship with a local credit union or bank, sometimes they have a portfolio division and are willing to invest in you.

Like I said, I haven't been in the business for a while and I currently deal with private investors now so I may be a little out of the loop but I hope this helps!