Most successful real estate investors don’t need a typical W-2, because much of their income is derived from property ownership rather than an employer. In the case that you do not pay yourself via a W-2, take into consideration the variables we list below in order to get a loan offer with the most favorable terms.
Use Your Business Documentation, Assets, and Plan in the Process
There are financing options for those who don’t depend on a W-2 to verify their debt capacity, which is the primary concern a loan institution will have. Initially, two valuable options for real estate investors are (1) a home equity loan and (2) a home equity line of credit (HELOC).
- Home Equity Loan. This loan type uses the equity residing in your current properties as collateral for the loan repayment. Functionally, many property owners see this as “withdrawing” equity from their home, when in reality it is converting the asset into collateral for the liability the loan institution takes on for the risk of extending the mortgage.
- Home Equity Line of Credit (HELOC). A HELOC enables property owners to use their equity as proof of debt capacity, granting them access to a credit line approximate to the equity value. In this case, the equity is not collateral, and the loan does not need to be taken billed on a note and amortized, since by opening the HELOC, no funds have necessarily been lent or dispersed.
Both a home equity loan and a HELOC are channels investors can leverage without being downgraded for having investment-based forms of income, as opposed to traditional paystubs. In order to get approved for these loans, gather your loan pre-approval documentation, such as business documentation, collateral documentation, tax returns, and profit and loss statements.
Combine Your Loan Strategy with a 1031 Exchange Strategy
Pair your equity-based borrowing strategy with a 1031 Exchange in order to subsidize the cost of the newly acquired property (called a “replacement property” in an exchange). The 1031 Exchange enables investors to sell a property (the “relinquished property“) and use funds to purchase a replacement property without paying any capital gains tax on the relinquished property (read more about how to use a loan in your 1031 Exchange strategy).
Follow Basic Loan Approval Protocol
Even though the home equity loan and HELOC options enable property owners to leverage the strength of their portfolio as the basis for a new loan, this does not entail that the documentation preparation process is any less thorough. Borrowers should always assemble meticulous records in all domains a loan officer will consider when architecting the terms of the loan offer (read more about how to get pre-approved for a loan).
Leverage the variables listed above in order to maximize the favorability of the terms of the loan offers you receive. Schedule a consultation with one of our loan experts to build a profitable loan strategy for your 1031 Exchange.