# Other options?



## Just a Guy (Mar 27, 2012)

I own a lot of real estate but, being self employed, have always had problems getting financing. 

Somehow, I've always managed to get it, but it certainly has become much more difficult over the years.

The latest changes from the Feds, the number of properties I own, the fact that I've got a good accountant to lower my taxes...all stack the game against me.

Lately, it seems like the bank's want me to increase my taxable income to qualify for more lending (at least that's been the latest excuse which I keep running into), and completely ignore net worth. It seems like they are asking me to increase the amount of taxes I pay to match the loan I'm applying for...so, if I want a 75k loan, I need to increase my income by $150k and pay $75k in taxes...which is just brain dead in my opinion, since I may as well just pay cash in that case.

So far, I've managed to get around all these "requirements" and always managed to get my loans at good rates through sheer persistence, but I'm wondering what others do, or who they go to for lending. While I've been successful, it's a lot of work lately...

I realize that the lending policies can, and do change regularly, but it never hurts to see what others are doing...It's not like I know everything.


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## gt_23 (Jan 18, 2014)

As a RE investor, I haven't noticed much of a difference with all the rule changes of the last several years, with the notable exception of having to put at least 20% down where I was doing 5% before.

I also remember the talk of how changing the rental income formulas (from 80% deduction to 50% offset I think?) was going to make it harder to finance larger portfolios >3 properties, but I haven't experienced that at all. I work with a broker and I suppose he is navigating the various lenders as they all seems to have different formulas and product features. All my investment loans are with the monolines and CUs, I don't even both with the banks anymore.

I think the $75k amount might be part of the issue. The lenders might view it as an undesirable RE market or it might be below their minimums.

Finally, I've never heard from any investors about the need to pay tax in an equal amount to the requested loan. However, investors do seem to always have issues "showing" income on the T1 tax form. Usually, this is because of one of three reasons:

1) The property actually doesn't generate net income (and cash flow is negative and equal to mortgage principal payments) - if this is the case, there are probably better uses for your investment capital
2) You use depreciation to reduce your net income zero - I generally believe that depreciation expense-taking is not a good idea since it doesn't change the form of your profit from income and tax rates are likely to be higher in the future. However, most lenders that I have dealt with will adjust your net income to add back the depreciation amounts for underwriting decisions
3) You under-report gross rent receipts or don't report them at all - I have met several investors who do this and I think it is quite common. Irrespective of the moral reasons for doing this, you need to understand you are trading future growth opportunities (by not qualifying for additional financing) for a present benefit in the form of lower current income taxes.


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## marina628 (Dec 14, 2010)

The issue is you need to be able to pay these mortgages without the rental income ,20% down and 50% of the rental income is the standard now.I am not much help for this as we always had enough income from other sources to meet the criteria.They have to go by the NOA for past two years and can't look at the networth.Not sure what recent changes by feds you are speaking of ,a sample property we owned from 2012 income taxes ,we had $13,200 in income and a taxable income of $4377 with rest going to mortgage interest , property tax ,insurance and less than $800 in other expenses.So you would need 10+ 100k or less houses to net 75k a year for sure.That house I quoted we owed $95,000 @ 4.1%


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## Just a Guy (Mar 27, 2012)

It probably has to do with the number of units I have. I'm well into double digits...

The last one I just completed was clear title, generating $1300/month and it took a couple of months before I found a mortgage. Used to be you could get a 50% ltv mortgage fairly easily without question, but many places rejected any loan whatsoever. 

I may have exaggerated the tax issue a bit, but the banks definitely wanted me to declare more income. Having a large family and a couple of companies allows me to reduce my taxes...

I also tend to reinvest in my properties to increase their value, plus I also acquire new ones to the portfolio, so I don't avoid taxes, it's more like deferring them.


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## gt_23 (Jan 18, 2014)

marina628 said:


> The issue is you need to be able to pay these mortgages without the rental income ,20% down and 50% of the rental income is the standard now.I am not much help for this as we always had enough income from other sources to meet the criteria.They have to go by the NOA for past two years and can't look at the networth.Not sure what recent changes by feds you are speaking of ,a sample property we owned from 2012 income taxes ,we had $13,200 in income and a taxable income of $4377 with rest going to mortgage interest , property tax ,insurance and less than $800 in other expenses.So you would need 10+ 100k or less houses to net 75k a year for sure.That house I quoted we owed $95,000 @ 4.1%


I disagree with you. I have several rentals and if they were all vacant, the total mortgage payments alone would be 2-3 times my net income from my full-time job.

Every time I have applied for a new home loan, the FIs want to know all the income/expenses on existing rentals and all other sources of personal income. I think they also put a lot of weight on your net worth and non-real estate assets. In my experience, as long as the DCR is sufficient on your existing portfolio, they consider that each property covers itself and exclude it from both your income and expenses. 

If what you suggest were true, than only doctors and the super-manager class would be able to build wealth in real estate.


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## gt_23 (Jan 18, 2014)

Just a Guy said:


> I may have exaggerated the tax issue a bit, but the banks definitely wanted me to declare more income. Having a large family and a couple of companies allows me to reduce my taxes...


Well thank goodness that banks aren't the only lender in town. Doing what the banks tell you will likely save you from significant losses, but it sure won't make you rich.


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## Mortgage u/w (Feb 6, 2014)

marina628 said:


> The issue is you need to be able to pay these mortgages without the rental income ,20% down and 50% of the rental income is the standard now.I am not much help for this as we always had enough income from other sources to meet the criteria.They have to go by the NOA for past two years and can't look at the networth.Not sure what recent changes by feds you are speaking of ,a sample property we owned from 2012 income taxes ,we had $13,200 in income and a taxable income of $4377 with rest going to mortgage interest , property tax ,insurance and less than $800 in other expenses.So you would need 10+ 100k or less houses to net 75k a year for sure.That house I quoted we owed $95,000 @ 4.1%


Marina628 is correct. When granting a residential loan on a rental property, max loan to value is 80% and you need to qualify using your declared income and can include 50% rental income. There is one other product out there which is quickly becoming obsolete which is the 'self-employed stated income' program where you can qualify with a fictitious income which represents an income including all the allowable deductions.

Net worth and good equity are definitely a plus however changes nothing in regards to qualification criteria. 

When the banks are indirectly telling you to declare more income....they are basically telling you that you are penalized for simply declaring less income since this is what is used to qualify your mortgage. You, may know that you make more than you declare but the bank does not know that and cannot assume that - some people do make more while most, certainly do not.

So what's your other option? Seek a commercial loan - based on your business credentials and income statement, you can potentially qualify for a larger loan and use that to fund your RE investments.

One thing to remember, residential mortgage loans are not catered to RE investors so its only normal you will find a hard time getting financing. As you mentioned, you've gotten around this lately....but you will soon realize that the doors will all shut on you because the rules are tightening. Most lenders will not even finance people who own more than 4 properties....and if rental income is your main source of income, the programs allowing this for qualification are quickly disappearing.


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## Just a Guy (Mar 27, 2012)

They seem to ignore my net worth lately...my liquid assets are higher than the total of my mortgages. 

Of course I rarely know the truth of what the banks are looking for. There was a point where I had two principle residences and they said I couldn't get a mortgage until I sold one of them...well, I sold one and they then said I needed more declare more income...

As I said, I've always managed to get the loan, but you do get tired of playing the game after a while.


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## Mortgage u/w (Feb 6, 2014)

Like I said....residential mortgages are not catered to RE investors. They are intended for the average homeowner. In the recent years, many 'average' homeowners tried to cash in on the RE boom so they took on additional mortgages. Took a while for the banks to learn that these inexperience homeowners were losing their shirts because of over-extended loans - and as you know, a bank will always lend you more than you should handle.

All this to say, the banks have learned their lesson and have tightened up on financing rental properties. The borrowing criteria has never changed in order to adapt to investors as yourself - so the risk has always been analysed the same way. Bottom line, they do not want to lend money to investors as yourself. You may have lots of equity and a solid net worth....but unfortunately there is no ratio calculation out there that can lessen the banks risk using your wealth. 

Keep in mind that the assessment is based on income vs repayment of the loan you are seeking.....if those numbers don't add up, then the assessment ends there.


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## gt_23 (Jan 18, 2014)

Mortgage u/w said:


> Marina628 is correct. When granting a residential loan on a rental property, max loan to value is 80% and you need to qualify using your declared income and can include 50% rental income. There is one other product out there which is quickly becoming obsolete which is the 'self-employed stated income' program where you can qualify with a fictitious income which represents an income including all the allowable deductions.
> 
> Net worth and good equity are definitely a plus however changes nothing in regards to qualification criteria.
> 
> ...


I'm sure glad you're not my broker. Either my broker is lying to me or he's altering the details of my application after he receives it?


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## Mortgage u/w (Feb 6, 2014)

gt_23 said:


> I'm sure glad you're not my broker. Either my broker is lying to me or he's altering the details of my application after he receives it?


I'm not a broker - I'm the guy who approves the mortgage sent in by the broker.

I don't know your situation but there's no traditional lender that will qualify loans using any other method than I already outlined.......if your broker is altering your application, I would be concerned.....


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## Just a Guy (Mar 27, 2012)

There are two problems with the commercial loans...

1) they want me to bundle several properties into one loan...which is a pain since my mortgages come due at different times...

2) they start at around 4.5%, which isn't bad, but not worth breaking mortgages (and paying penalties) at the sub 3% range...mortgages which I'm unlikely to ever get back.

I still believe there are always ways to find money...I've always started with a firm "no" and gotten around it, but there must be other sources of funding out there...I know people who own a lot more than I do, and they don't declare millions in income...

Of course, I'd have an easier time getting an apartment building, but I haven't found one of those reasonably priced in years...


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## Mortgage u/w (Feb 6, 2014)

There is a reason commercial loans are more expensive - they are not intended for the average investor and carry higher default risks.

You can always find options for turning your 'no' into a 'yes'....but you will soon run out of options - on the residential side, that is.

One way to get the financing is to not declare your other properties and hope your lender doesn't discover them......I don't recommend this because it carries severe risks depending on who gets your application. I'm only mentioning it because many brokers (along with their clients) try this route and which some lenders will accept it.


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## Just a Guy (Mar 27, 2012)

I'm not one for going the fraud route...

I stick with the high liquid net worth, no debt other than rental mortgages, high credit score, etc. I was told I'd hit the limit at 5 properties, but I managed to blow past that long ago.

I'll probably have to go commercial soon though...but I'd need to go on another buying spree to make it worthwhile. Like I said, they won't fund just a couple...

Seems pretty silly that they are so focussed on their qualifications which allow any idiot with a job to qualify, but not a proven investor who finds a good property. I also don't need the income from these properties (unlike some "investors" who qualify), so I spend a lot of the profits upgrading and keeping the property in good shape (better than giving it to the government who'll just waste it). 

As I said before, ironically I could overpay for an apartment and get a loan, but I can't buy individual doors at a cheaper price (meaning better cash flow).


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## Mortgage u/w (Feb 6, 2014)

Just a Guy said:


> I'm not one for going the fraud route...
> 
> I stick with the high liquid net worth, no debt other than rental mortgages, high credit score, etc. I was told I'd hit the limit at 5 properties, but I managed to blow past that long ago.
> 
> ...


I totally agree with you. There are indeed very good investors out there who carry low risk and should qualify with no questions asked. However, the lenders make very little profits on these; Less turnaround, less payouts, cost to analyze will be more costly and lets not forget the risk is higher than your traditional mortgage.

I guess in your situation, you're at that pivotal point where you can maybe qualify or handle a few more residential loans....but on your way to require a commercial loan.
Eventually, you may want to trade your smaller buildings for larger ones - the commercial loan will definitely help you achieve that.

One day you may become the next Donald Trump.......I doubt he's looking for residential mortgages. :biggrin:


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## Just a Guy (Mar 27, 2012)

I have an issue trading up...these things are cash cows...anything you try to buy these days can't even come close. Of course, I may just pay them out and buy something bigger when the crash comes. Of course, if I pay them out, my declared income will have to rise, so I may just keep going...many of my early purchases are nearly paid off...


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## Mortgage u/w (Feb 6, 2014)

..and that is why you will most certainly consider trading them for a bigger property. If you can net the same profit and declare less due to higher expenses all the while keeping an equivalent value in property....why wouldn't you make the move? Eventually you will be cashing in 100% of the rent on your current properties with no debt to offset your taxable income. 
You will surely find value in a larger building. $100k per door is the going rate nowadays but you can surely find a 20 unit for under $2 mil. If you got some commercial units on main floor, your income increases dramatically. Commercial office space is another profitable entity. 
I'm not teaching you anything new here as I'm sure you are already aware.....its just a matter of making that leap.


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## Just a Guy (Mar 27, 2012)

Yes, but if I sell, the government takes a large chunk of capital gains, so I lose a significant amount of the equity I have in the market...if I don't sell, I defer the capital gains.

I'd still rather get the two bed units for $75k and the threes for $85k than pay some guy $100k for a bachelor in those 20 unit places...not that I'm not looking, I just want to make sure I make money.

Irronic, considering the underwriters want me to do the opposite...

After the correction, I'll probably find what I'm looking for quite easy...

Of course, I could stumble upon an inheritance that wants to sell...


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