All Forum Posts by: Julee Felsman

Hi @Jimmy Lieu!

Happy to offer info. :)
You'd have to verify with your employer, but I would assume that "regular payroll" would mean a W2 employee. That will bring fix your income issue for lending purposes.

If you own 25% or more of an entity for which you work, you are considered self-employed and the same rules apply. Forming an LLC doesn't really fix the issue.

Julee

HI @Jimmy Lieu!

1099 income is considered self-employment. The Fannie Mae guidelines for curation of self-employment are here and Freddie Mac's are here. 

In a nutshell:

• Self employment with less than 12 months of duration cannot be used for a loan. 
• Self-employment income must show up on 1 full year of tax returns (so if you started today, your 2021 tax return would fall a little short of this). If you started 1/1/21 or earlier your 2021 taxes will do the trick.
• Lenders must document that you have a 2 year history of work in a similar field. In theory your time in school could count if you studied something akin to what you are doing for work.
• But (the rub), lenders also must document a 2 year history of income at the same or greater level. If you were a graduate student with a stipend or salary as a research assistant or teaching assistant you may be able to check this box. But if you were a full-time student and not working, you won't have income to show.

My hunch is you'll need one of two things to happen for this job to work for loan qualifying... you'll either need to stick with it until you file 2022 returns or you'll need to talk them into bringing you on as a W2 employee.

Alternate options for your purchase would be to have someone cosign for you (not anybody's first choice, I know) or (if you are buying an investment property (I'm not clear on that), but using a debt service coverage ratio loan (DSCR). These programs are designed to allow investors to purchase a rental property based strictly in the cash flow the property generates. Personal income is not verified or included in loan underwriting. Instead, the rent for the property (or in some cases a percent of the rent) needs to equal or exceed the PITI.

These loans are not at the best terms, but they can be a great stop gap to get you into a property when traditional financing won't work. (And you can always refinance to improve the loan terms later.) BUT they are only available on investment/non-owner-occupied purchases. 

Hope that clarifies things a little... although I know this is probably not what you were hoping to hear!

Julee

@Account Closed who are both local experts and amazing resources). 

I'm happy to be a sounding-board for any loan-related questions you have. Here are two things that come immediately to mind...

If you want to put <20% down, you'll likely be financing with an FHA loan. FHA financing requires 3 & 4 unit properties pass a "self-sufficiency" test, whereby 75% of the appraiser's determination of market rents must equal or exceed your new total payment (loan, taxes, MI, insurance). That's a very tall bar for most properties in our market.

Also, given that you already own other rentals, your purchase will go under added scrutiny in underwriting connected to your occupancy. You will likely need to sell the underwriter on your planned occupancy with a letter explaining why you're moving from your current residence to the plex you are buying. Your occupancy will need to make sense to an underwriter. If you're moving from a bigger, nicer home into a dumpy, fixer plex, you can expect some push-back.

Good luck!

Julee

HI @Matt Koski and welcome to Portland!

What cash flows probably depends a bit on what you mean by "cash flow". When I house-hacked, way back in the day, I was happy to have supplemental rent from the other unit in my duplexes (I lived in two prior to moving to my now long-term home) that kept my net mortgage cost to something affordable.

I worked on the properties while I lived there (a couple-three years in each) and then when I moved out, i was able to (just barely) cover the loan payment, taxes and insurance with the rent from both units.

I was out of pocket when I needed to make a repair and paid the garbage and water bills myself for a while (until rents climbed a bit). For me and my budget that was fine and it allowed me to buy great properties that years no (20-ish years) are cash flowing excellently (even after refinancing to shorter term loans so that they'll be paid off when I want a bump to passive income for retirement). 

I am a lender and talk to a lot of prospective clients who want to have a net positive cash flow day one when they move out or even live nearly "rent free" with the tenant's rent covering their entire mortgage. I won't go so far as to say that's not possible -- maybe you can find a unicorn -- but in coastal markets that's going to be a pretty tough nut to crack. 

My 51 year-old self is really happy that my 25 year old self wasn't too "greedy" about what I wanted the properties to do right away. My budget allowed me to cover the costs rent didn't cover at first and time, rent increases and appreciation took care of the rest. 

The configuration of the property certainly impacts how it "lives" so you and your wife probably need to negotiate what's an acceptable living arrangement. I lived in up/down plexes and was always downstairs, so I had renters overhead but didn't have to worry too much about my Great Dane tromping around and bugging them. If I had it to do over again, I'd probably look for side-by-side properties... but you guys need to work out lifestyle issues. 

Once you hash that out, you can build your property search to filter for places you guys are both down to live in. (And remember that your loan will only require that you live in the property for a year after closing.)

Good luck!

Julee

Hi @Destin Brown!

Congrats on taking the plunge! :)

This is going to be a little meta, as I'm a lender answering a question about questions to ask lenders... but here goes... 

I don't know that I can give you script, but I'd suggest you focus your conversations with lenders on trying to figure out how well they know their guidelines. 

Loan officers are often hired and trained to be salespeople. There's nothing wrong with being a good salesperson (so long as you are looking out for your clients' best interests), but you want to be working with a loan officer who's at least a "guideline geek" if not a "guideline guru". 

The BRRRR strategy is centered on leverage. You want to use other people's money as efficiently and cost-effectively as possible to grow your wealth. Your loan officer (or your clients' loan officers) hold the key to accessing that money. You want a loan officer who knows all the nooks and crannies of the rules you'll need to navigate together to borrow as much as is possible (or appropriate) at the lowest cost.

Offering scenarios (your own, clients, situations you imagine encountering) would be a good way to get a feel for how well a loan officer knows their stuff.  

And because BRRRR investing (and house-hacking) is a long-term game, you want a lender who can be a strategic partner to help you and/or your clients formulate and execute on what might be a years' long plan. Maybe ask if they've helped investor clients work their way from an initial purchase (owner-occupied or otherwise) to a larger portfolio.

I also think it's useful for a lender to have house-hacked, to have some rentals of their own or to have at least a little bit of experience working with investor clients. So just asking about their own experience would give you some insight. 

This last component is not, I should add, critical (I didn't even own my own home when I started as a loan officer and some of my first clients were investors). But having some experience does have a lot of potential to bring some value. I often find myself taking off my lender "hat" to talk about tax stuff, or LLCs and risk management, or any number of other tangentially related topics that can circle back to lending and impact how we structure a loan. 

Like I said, not a list of questions, but hopefully that'll give you some ideas as to what to listen for when you talk to lenders. Good luck!!

@Lyndsay Dentel hi there! You can absolutely do all of this. :)

Hands down the best 1031 facilitator in Portland (or anywhere) is Toija Beutler with Beutler exchange. I have had hundreds of clients us her and have used her team myself twice. 
https://www.beutlerexchangegroup.com

Ask her and/or your CPA how soon after closing you can refi.

And note that on the refi your maximum cash back will be limited to 75 ltv (assuming single family) up to the the amount you spent to acquire the property (price and closing costs) during the first 6 months.

@Wendell Butler Yes, I have had underwriters sign off on using rental income with less than 2 years' history on tax returns. A fallback can be to bring on a property manager (as extra insurance), but I'd push for using 1 year of rental history on your tax returns. You could bolster your cause by pulling data together to show you're buying in a strong market for rentals. And you can bolster your cause by taking landlord training at that link above. 

And FWIW, I like more doors as do many of the posters above, @Wendell Butler. You're likely to get better cash flow (initially and when you move out) and less likely to have multiple vacancies all at once.

@Wendell Butler

Lender here! I've worked with a good number of house-hacking veterans... such a great option. You just need to know the guidelines -- or make sure your lender does anyway. :)

In case you've not already found them, the VA underwriting guidelines are available here. Chapter 4 (new) is where you'll find information on rental income. Page 25 of the document is where it starts. I'll paste the rules for a multi-unit property below for easy reference. 

If you've got prior experience managing another property, you should be able to include 75% of the rent from the other units (actual leases in place) on a subject multi-unit property as part of your qualifying income. Worst-case, you might need to sign a contract with a property manager to convince an underwriter you will be successful as a landlord. 

You might help you case by showing you've taken landlord education. There's a free course from MGIC (a PMI company) here. 

You'll need to have 6 months PITI reserves from your own savings.

And if you're keeping your current residence and converting it to a rental there are some additional rules to consider: You'll want to have a lease signed prior to closing (technically not required, but tough to do without), rent can do no better than offsetting the payment (positive cash flow is not allowed), you must have at least 3 months PITI in additional reserves for that property.

For other rental properties the guidelines do require that you show a 2 year rental history on your tax returns. (Admittedly strange that the VA allows a new lease for your old residence that you're renting out for the first time, but wants two years' history for an established rental, but that's how the guideline is written... loan rules are maddeningly counter-intuitive sometimes.)

Good luck! LMK if you have questions!

Hi @Ellie Johnson!

So long as you feel good about the area (and it sounds like you do) and your prospects for decent renters and cash flow, I'd finish the project and hold it. 

The wildly optimistic bid for the work is a huge disappointment (and shock), i'm sure, but you're going to wind up at about 80LTV. 

Putting on my lender hat here for a minute: you're leaving less cash in this deal than you would if you were to have purchased it (done) as a rental. The maximum LTV on a non-owner-occupied triplex is 75% (70% on a cash out refinance).

Putting on my fellow Portland buy & hold investor hat now: 70% to 75% (to maaaybe 80ltv)  has always felt (to me) to be a "safe"-ish amount of leverage to get a nice return on your capital without being so over-leveraged that you're asking for trouble when the market corrects or consolidates or life throws you a curve-ball unrelated to the market. 

If you're antsy to go buy something else, tying up that money may feel disappointing, but real estate investing is (IMHO again) a long play and patience has never hurt me. 

Flipping the decision around: 

Imagine you were offered the option of writing a $40k check but having more liquidity to go find another deal (realizing it'd need to be a good enough deal to recover those losses before it made you anything)... 

OR...

$145k equity in a solid, well-leveraged buy & hold deal with upside (neighborhood value, adding more units).

You may decide to take a different path, but I've always chosen Door #2. It's the devil you know. And I have never (in the long run) regretted hanging onto a property, even if (in the short run) I've stressed out about spending much more than I'd hoped to renovate it and considered committing arson on occasion (kidding) (kind of) (but really... just kidding). 

Good luck!!

Julee