We’ve talked about how credit history and debt to income ratio can affect your chances of getting financing. Now I want to talk about another loan approval obstacle that just about every real estate investor will face at some point: being self-employed.
It’s ironic, really, because becoming self-employed is the whole point for most people. 99% of the people who come to my seminars and training programs want to quit their jobs and do real estate investing full-time. That’s what financial independence means to them, and they can’t wait. You can see in their faces: they’re imagining the day when they can tell their boss, as the old song says, to take this job and shove it.
So being a self-employed real estate investor is really a mark of success – you’ve achieved a goal. You’ve acquired enough cash-flow properties to replace your income. That’s a huge milestone.
Only lenders don’t always see it that way. Hey, you know and I know that in today’s world, working for a big company for a long time is no guarantee of security. But bankers still prefer to see a steady work history, paystubs, and W-2s. It’s what they know.
They don’t just take this view of real estate investors – it’s the way they look at anyone who’s self-employed. You could be a plumber, a carpenter, an accountant, or a day care provider – they don’t care. It’s just those two words that set off their antennae.
That’s not to say that self-employed people can’t get loans. Millions of self-employed people get loans every day – including me, and thousands of self-employed real estate investors I know. And so can you – but you need to anticipate the questions and be prepared with good answers.
People love the freedom of being self-employed – but the lack of structure and dependability can make lenders nervous. You have to show them that you’re not just on an extended vacation – this is your business, and you’re running it like one.
That means keeping good records and keeping good books. I recommend hiring someone to keep you on track – sloppy bookkeeping can really come back to bite you. You don’t need a CPA for the day to day stuff, just an experienced bookkeeper. A good one can probably do everything you need in a few hours a month. It’s best to use one of the small business bookkeeping software programs – they stay up to date with changes in the laws and make reporting a snap. It’s worth the investment, not just for satisfying lenders but also for managing your taxes each year.
When you’ve got good, up-to-date financial information at your fingertips, you can easily show a lender a two year income history, and your year-to-date cash flow trends. If the numbers and the trends are good, that is often enough to get you over the self-employment hurdle.
There’s another way to approach it that can make it even easier: create a property management company and call yourself the maintenance supervisor or property manager. Set up a simple payroll system and cut yourself a check every two weeks. That way you have paystubs, you have a demonstrated income stream, and your business comes across as stable, organized and professional. You may be doing all this off a card table in your bedroom, but they don’t need to know that. Again, this will not only make it easier to get loans, it will also make tax time much simpler.
And here’s another benefit: this approach will keep you mindful of the fact that you’re actually running a business. You don’t have a boss, you can set your own hours, you can work in shorts and flip flops from your backyard patio if you want to – but it’s still a business. Breaking free of someone else’s structure feels great – but few people can be successful in an environment without any structure at all.