Financing

[Brad McCulloch]

I have recently been talking to a few local lenders about transitioning from small real estate investing (I own 5 small homes in rural areas) to purchasing larger, multi-unit housing.  Since I am currently showing a loss on my taxes for these properties, the banks are telling me that they won't use my investment income as a basis for additional loans. 

My question is, do I need to change my tax strategy and not show a loss, or do I need to pay myself a wage?  I took an early retirement a few years ago and am on on a fixed income that is about maxed as far as the banks are concerned in regards to additional loans.

I'm new to this type if investing and I know I am missing a lot here, but if you have equity in a property, and the property is used as collateral, shouldn't this be considered by the bank in addition to your income.

Thanks for your time,

Brad

[Bill Gulley]

The old.....do I save on taxes and shoot down my ability to borrow....question.

Qualifying income is 30-40% of income, tax savings is 1-your tax rate=gross income required to qualify, so you need to adjust, you're probably around 5% or so of tax savings on gross giving away your ability to borrow. View the tax expense as part of your cost of money, cost of borrowing for business needs.

My view is that paying taxes means you're making money. I'd rather pay taxes than be in a position of not having the income to pay taxes on.

Paying yourself a wage is not really a way to go in most small businesses as a lender still looks at the business' ability to pay that wage and retain enough for operations. That will be pretty much ignored by a lender as they will still be looking at the source of funds, business income available to pay its way.....and you're running the business and from that stand point, your business should have a return above the salary level, so you could make the perception of success even worse. Debt coverage ratio for RE are from 1.25% to 1.5% (with experience) and some lenders will want even more. Newish borrowers can well be at 2%.

It will also take a couple years to get back to a profitable stance to be in better shape, next year's bounce in income probably won't be significant, depends on how long your company has been around too, they may look at the past 3 years.

So, looking for every expenses and possible write off can have long term consequences, might be better paying 5% or so more in taxes.

Until then, look to alternative financing deals, build your portfolio increasing your income, showing growth will certainly help. With experience most bankers will count income from new acquisitions in your business income. Good luck :)