How to purchase as W2 and 1099 partnership
I wanted to get your opinion on how to go about moving into fulltime real estate investing. I am currently living in Sunny San Diego, California in the last year have flipped 9 homes. Here is the scenario below. I am concerned about getting financing and really want to purchase the most amounts of properties with the $400,000 we will be investing.I will be investing in rentals with a business partner, we will each put up $200,000. My partner is a W2 Employee and makes $75,000 a year. I am a 1099 independent contractor and make $100,000 a year. I want to figure out the best strategy to buy the homes.The homes we are looking at are in a price range from $75k to $150k. We planned to put 30% down on each property. So the average price is $112,500 the down would be $33,750 plus closing costs so let's say $40,000 total out of pocket. That means we could purchase about 10 homes with investing $400,000 My understanding is that you are only allowed to have up to 10 financed properties. So my thought was that we each buy 5 in our names and then put those into a corporation or LLC. Since we will both be relocating to where we buy homes that means we will not have a job anymore. This is where I don't know what to do, I know it easier to get a loan if you are a W2 employee so my initial thought is buy the first 5 properties under my partners name. Once that happens we will be generating some rental income and he can quit his job( he hates his job and wants to leave asap).The rental income I was thinking would be paid to some type of corporation we set up and then pay myself as a w2 employee form that corporation so then it would be easier to get a loan.Any thoughts or recommendations on this would be greatly appreciated. I am wanting to do this ASAP but do not want to end up in trouble. Thank you in advance for your help!! by Bigdeals21 from Irvine, California. Jul 22nd 2015
Richard Airey (richardairey)
#3 ranked lender in Maine - 662 contributions
You will have difficulty obtaining financing as the new business will be owned by you. Basically, you will not get approved for financing until you can show a 2 year history of income from the LLC. That is unless your 1099 independent contractor income will be continuing. For the next 2 years you may have to obtain "Hard Money" to purchase the properties. You will pay much higher closing costs and the interest rate will probably be double digits, but it could make sense for the short term. Hope this helps.
Chris Neuswanger (mtnmortgageguy)
#92 ranked lender in Colorado - 92 contributions
There are a number of issues you will face. Putting the properties in a LLC once you own them does not help because the loans will still be in your name and that will be the rub. Its not the number of properties, it's the number of loans. You and your partner need to keep your day jobs if you want to borrow any money at a reasonable rate for at least two years as you will need that long a track record to establish your taxable income to use that income stream for qualifying. Beware that few lenders will look at profits made from flipping houses as stable income. Profits made from rental income can be looked at as stable. Also, if you are flipping homes you bought with long term financing you are going to burn the originator if you pay them off quicker than six months. If a FNMA loan pays off early (within 180 das usually) the originator has to not only pay back his commission but pay back any overage that was given to you to cover closing costs, I hope you did not do that or plan to do that. One thing I would point out is if you are buying a property to keep for the long run you can generally have the lender do an operating income analysis on the property and add the projected net income towards offsetting your mortgage payment on the property and you only need to qualify for the negative income portion. Once you get past five properties you will find that about 80% of the mortgage lenders out there will not lend to you even though FNMA says its permissible. Also, beware that you cannot get a fannie or Freddie loan on a property being bought in a entity, you and your friend will have to purchase them in your own names.
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