How to Finance Rental Properties Without W2 Income
We help a lot of investors make their first investment in real estate, and many of those investors do have W2 income. They have good, solid jobs, they don’t have the time to go and manage these properties or find the deals, etc., so I’m that resource for them. These investors who have full-time jobs are able to get conventional financing due to their W2 income. If you are an employee at any company then you do have some W2 income. The other type of income is called 1099 which also counts and makes you eligible to get Fannie Mae financing from these conventional lenders which lend on 30-year terms at the lowest interest rate possible, around 5%-5.5%.
I have been helping these people get regular conventional financing but I recently just helped one of my investors buy a couple of rental properties without W2 income. So this gentleman owns his own business, he doesn’t have any W2 income, he runs everything through his business so he doesn’t take any money out of the company. He does have cash in the bank account that he has available. So what can somebody do when they aren’t a regular employee? You own your own business, you’re making good money with your business and you want to invest in real estate and you can’t gain conventional financing, that’s what I’m going to answer for you.
The first thing that I did for my client was I went and found an asset-based lender. An asset-based lender is a company who will give you a loan based solely on the financials of that property. So the cash flow that that property generates, they’ll pretty much just look at the cash flow, the profit and loss statement for that rental property, then they’ll do an appraisal, make sure the property is worth that amount of money, and then they’ll lend you based on that appraisal that they get back. That is what we did with this investor. I have an asset-based lender that I referred them to who has great terms, 30-year amortization, a little bit higher interest rate, but they were actually able to give one of my clients a loan based on just the appraisal and the cash flow that the property generates. They didn’t ask for any tax returns, they just wanted to see that they had enough money in their bank account for the down payment, and that’s it.
So one option is using those asset-based lender, and that was terrific. It was probably the fastest and most seamless property purchase that I’ve ever encountered. Just did the appraisal, made sure he had the money in the bank account, and that was it. It was incredible. And it was also pretty good terms for being a non-conventional lender.
The second option would be finding a commercial lender who lends on portfolio loans. There are many of these banks out there. Some credit unions are actually like this where they will do portfolio loan. So what you want to look for when you are doing your research is commercial lenders who do portfolio loans for whatever type of asset class you’re looking for. If you want to do a small multi-family, then type in multifamily portfolio loans. A portfolio loan is a loan that is typically on one or more units. What we’ve done in the past where we’ve had four single-family homes and we’ve done a portfolio loan cash out refinance. So it’s anything that’s over one unit.
Typically these commercial lenders won’t help you get financing on just a single-family home, most of the time it’s because the purchase price is just too small for them. They want to lower the risk for themselves, and many of these portfolio lenders do have loan minimums. The reason is because many of these commercial lenders who do these portfolio loans have pretty high fees. So something that you do want to watch out for when talking to these portfolio lenders is their fees.
Many of these lenders do have loan minimums of $75,000 or $100,000. That’s why it’s a good idea to actually find a couple of single families or find a small multifamily property and then begin using these lenders to fund those deals, because then the fees are going to start to make sense. If you’re just trying to buy a single-family home for $70,000 and you have $5,000 in fees, it doesn’t really make much sense. You’re now going to have to pay 7 or 8 points on that loan and it doesn’t make sense anymore.
The way that I found these lenders was just going through Google. I typed ‘asset based lender’ in the city that I was looking to help my client buy that rental property in. I just went through Google and just typed asset based lender, or portfolio loan, and there’s a ton of lenders that you can find that way.
What I would do is I would just start cold calling them, letting them know that you’re a real estate investor, you’re looking to buy rental properties, you want to know what their loan minimums are, you want to know what their fees are, you want to know what their loan-to-value ratios are, and that you’re interested in buying some properties. The catch is that you don’t have any W2 income, so you need their help with that, you want to make sure that they don’t do conventional Fannie Mae loans, you want to make sure that they’re a commercial lender and that they don’t really care about your W2 income.
I called probably twenty or thirty companies and found seven or eight companies who didn’t really care too much about the W2 income, they just cared about the asset, and that’s exactly what you’re looking for. Once I went through and found those twenty or thirty lenders, I just gave them all a call, then I created a spreadsheet to keep track of all their term sheets.
What you’re going to ask these companies for is their term sheets. Those term sheets will show their fee amount, how much the interest rates will be, and then what their loan-to-value ratio is. You want to have a very high loan-to-value ratio, probably around 70-80%. Some of these commercial lenders will lend you LTVs of 50-60%, and LTV stands for loan-to-value. For example, the bank is going to underwrite your property, they’re going to do an appraisal on that property, and let’s say the value comes back at a $100,000. Some banks are going to lend you $60,000, which be a 60% LTV, and some banks are going to lend you $80,000, which is going to be an 80% LTV. You’ll only have to come up with $20,000 out of your pocket, which is great.
To reiterate, you may want to find some bigger deals before actually going and talking to these commercial lenders, because if you’re just trying to finance a single-family home without W2 income in the $70,000 price range, they may not be worth it due to the fees. The lender that I’m personally working with, who is an asset-based lender, they have a loan minimum of $100,000. And I found out a lot through my research, through calling these companies that they do have loan minimums. And if they don’t have loan minimums then they do have points or fees minimum. For example they will have fees of 3% of the loan amount or $2,500, but if you’re doing a loan for $50,000 that $2,500 in fees is five points now, which is really expensive.
If you need any more help, if you’re looking for asset-based lenders in your city, I have a couple who may be able to help you. Feel free to reach out to me. I hope this was helpful for you. I know there are many of you out there who own your own business, who are struggling to get financed. My dad and I both own our own business and for us when we first started out before we knew any of this stuff, it was hard for us to get a loan for $40,000 because we’ve ran everything through our company. So we know what the struggles are, we know through our research and stuff like that that these lenders are out there and they’re ready to make loans to you. They’re just a needle in the haystack.