All Forum Posts by: Doug Smith

Jon, OK, I get it now. If you file jointly, flip back to your Schedule E. It doesn't only list your rental properties, but it has any interest that either of you have in other entities. Whatever is listed on that Schedule E, good underwriters with a formal credit background are going to want to see those returns as well. They will not only allow depreciation, amortization, and interest expense to be added back in to the income that carries through, but also it will allow the lender to see what other contingent liabilities a borrower might have that they haven't disclosed. Let's say one of your businesses has a $50K line of credit that is maxed out to a community bank. Not all community banks or other lenders report to credit bureaus, but they will see that you are writing off interest expense and reporting a liability on the balance sheet on the return, so they will ask about that. Most consumer underwriters don't understand self-employed lending well enough to have a command of business returns and financials, so you might not get the question, but you will at least be prepared. I wish I knew good local lenders in California to refer you to, but we don't do business out there. Good luck!

One thing to add: If you file jointly, don't be surprised if they want to see your wife's W-2s for those particular years if you are borrowing only in your name. The reason being that they will want to subtract her income out of a joint tax return. I don't think you mentioned the type of property you are financing. Conventional financing on a single family home usually won't require you to add your wife. For commercial, we usually try to get the wife on as a guarantor if at all possible. Good luck. I hope that helps. 

I can speak for conventional lenders when I say that we would always require the required cash injection from the borrower to go in first and then we would set up a draw schedule tied to completion milestones with the loaned funds. In my banking days and even now with Castle Rock, we don't hold your money, but we close and don't inject the loaned funds until you've completely injected all of yours. We'll have an inspector visit at scheduled times to ensure the required work has been completed to each agreed upon milestone and then we cut the checks directly to the contractors. 

We also own a real estate arm, so pulling comparable properties on the MLS is quite easy, but for others, if you can build a relationship with a good, reliable realtor with MLS access, they will usually be happy to help if you let them help you find property for you and sell properties that you are flipping/selling. Look for homogenous homes in homogenous neighborhoods. I other words, neighborhoods were you can find really similar homes to the one you are looking to buy. Use the internet to find recent sales of homes similar in square footage, style, age, and condition to the one you are buying within the same neighborhood. Those sales should be in the same approximate range. It will give you a good idea. Here's the key...you really need someone who knows how to value real estate on your side. Until you learn how to value a home, you'll make very expensive mistakes. Good luck!

Tell us more about what you are wanting to do? It would help us answer your questions. 

Michael, I was a banker in the Tampa market for 20 years and know lenders at most banks in town. PM me and we can chat about your specific situation and I can give you some guidance. 

We beat our agents until morale improves. Seriously, in our real estate sales arm, we only bring on agents that prove to us that they will take phone calls at 9PM on a Sunday night. If they don't, they aren't cut out for success. In our note business and real estate investment company, we got so frustrated with agents that we started our own real estate sales firm. There's just not that many good agents out there that have the commitment that we require in selling our real estate. If you find the magic answer for motivating the majority of agents, let us know. 

Gotcha. Sorry for the misunderstanding. In that case, we just use at Operating Agreement for the entity (the JV), which would be an LLC with the investor and then us having a token $100 ownership for tax purposes and then a Management Agreement between the JV and your "management company". The management agreement details our compensation, duties, powers, investment parameters, and most importantly how we agree to unwind things if the parties grow unhappy with the relationship. We typically take a specified percentage of the Assets as a management fee (2%-3.5% depending on the JV size) plus 20% - 50% of the profit depending upon the deal size. The positive to this is that, if the deal goes South, it's an equity relationship where the losses are on the investor and they can't come back against you unless you were grossly negligent or committing fraud of some sort. The negative is that you might be giving up profits that you would normally get if you were borrowing. We like the JV setup and use it a lot with larger investors. Again, I don't know Illinois law, so you'll want to chat with an attorney that is familiar with JVs. Good luck!

Retirement contributions typically do not count towards your DTI (debt to income ratio). It does, however, depend upon the lender. Going off topic a bit, some lenders (usually portfolio community banks or private lenders) will look not only at DTI but also "disposable income" to determine one of The Three C's of Credit...Capacity. In other words, does this applicant have the ability to pay the loan back. Let's say you make $1000 per month and have $200 in debt payments, your DTI would be 20%. In this scenario, you would have $800 in disposable income. Now lets say you have $10,000 per month in income, but $3000 in expenses, your DTI is higher at 30%, but your disposable income is $7000. A smaller bank or private lender will look less at DTI and more at the overall Capacity rather than DTI. A GSE (Fannie, Freddie, etc) will typically be more robotic and focus on hard numbers like DTI. If I was underwriting the deal, I would not count your qualified retirement contributions against your DTI, but since you can't touch it without penalty until you're 59 1/2 and since I typically can't come after a retirement asset should the deal go South to collect the deficiency balance, I'll want to make sure you have the disposable income and income stability to cover the Capacity to pay me back. Hopefully that is not "as clear as mud." Good luck!

Hey Jefferson, I was a credit officer in both huge national banks and local community banks, so I'll approach your question from that angle and only discuss the mechanics of the financing rather than the wisdom of holding vs selling (that's something you can figure out, I am sure). A four-plex can fall under consumer, residential guidelines or commercial underwriting guidelines. Large, national banks typically don't have an appetite for deals like this and the folks at the branch level don't typically have the credit background to understand the deal anyway. I would stick with the small community banks with an experienced lender with actual credit authority. Believe it or not, lenders typically start at large banks and they "graduate" to community banks after cutting their teeth. National banks require the loan to go to a central underwriting department. Community banks typically decentralize the decision making process for smaller deals like this one into the hands of local officers. If that officer has experience and a formal credit background, ask them what their loan limit is. That is the amount that they can unilaterally sign off on to make the loan decision without going up the food chain or to a loan committee. The loan limit will be different for real estate backed and unsecured loans. If the officer's loan limit is greater than your loan request, you are probably talking to the right person. They can tell you whether a deal will fly or not. Most banks hate backing real estate investors. They also will usually want more than 18 months of experience as well (usually at least 2-3 full calendar years with tax returns to back the cash flow). Find the person I described above and they should be able to give you the answers you seek. Good Luck!