A Mission to Go Out of Business and How to Get a Mortgage without W2 Income

IMG_0858
View of the Adriatic from Novigrad-Cittanova, a town in Istria County, western Croatia. My grandfather lived here before emigrating to the US. September, 2018.

POST LABOR DAY / RETURN FROM SUMMER HIATUS EDITION

Hi all,

The Between Tides newsletter is back from a summer hiatus!

It wasn’t a hiatus of relaxation, but instead a writing break so I could focus on ramping up my new media consultancy, DWA. Over the past few months we partnered with some exciting new clients, brought on our first hire and contractors, and launched a weekly newsletter. Like anyone going after a big goal, I had my blinders on and had little time for anything else. And, it hasn’t been all smooth sailing.

Also, for a while I have wanted a single online home for all my Between Tides writings. Previously, they were scattered across Medium, MailChimp and LinkedIn. Now, all my new and old writings will be at www.betweentides.com. This is my new (and very simple) blog site that took way too long to build, and is now powered by WordPress after a failed Wix attempt. Note that I’m still in process of transferring my archives, but a few of my favorites are there.

Now that the infrastructure is sorted, I’m very excited to get back to what I love most…writing about my investment and life learnings, and hearing from all of you!

So, let’s get to it…today’s BT edition discusses a company’s mission to go out of business, house envy, mortgage financing hurdles for non W2 employees and more.

Onward,

Chris

READ TIME = 5 min
Quick Hits: 2 min
Sans W2 Financing: 3 min


 

QUICK HITS:

  • One of my relatives and his wife, Maurizio and Marisa Donadi, recently launched Atelier & Repairs, an incredible and highly talented initiative to up-cycle used clothing and inventory. It boasts some famous celeb clientele, though that’s not their focus. Over a grappa in Italy, Maurizio told me his goal is to go out of business. I was enthralled with his reasoning. Learn more about it on their About page.
  • I’m transitioning more and more of my near and mid term investments (i.e. not my 401k / IRA) to conservative assets (bonds, cash) and paying down debt. I don’t know when the market will turn, but I want liquidity when it does. It feels rich, and I have anecdotal observations of some softness in my real estate target market and other niche industries. Of course, trusting one-off observations is far from a scientific approach, but my gut is telling me to be conservative. When the market does turn, real estate deals will be plentiful, and I’ll want liquidity. Further, as a new business owner, I need to be ready to weather a down period and make capital infusions if necessary…is your specific financial situation prepared to get you and your family through an economic change?
  • I turned my phone screen to B&W. Reduces social media usage. Credit to Tim Ferriss for sharing.
  • When your peers buy a beautiful new home, leave envy aside. Instead, celebrate the purchase and enjoy the new space via housewarmings and BBQs. Good for them. Further, life is a marathon, so don’t let “the Joneses” and misplaced haste rush you into a new home if you’re not ready. Otherwise, that purchase is not something to celebrate, but instead a financial burden to carry.
  • Montana has special significance for my brothers and I, so we recently started searching for land to buy there. Will we reap direct financial rewards from this purchase? Not in the traditional sense. The great thing about real estate is that it can also provide incredible reward in the form of holiday destinations, family legacy, escape, creative inspiration and self-sustenance. I write a lot about real estate’s financial benefits, but many of us gravitate towards it for numerous other reasons. We must not lose sight of these. Of course, I’m confident these “other” rewards can also be financially quantified.

HOW TO OBTAIN MORTGAGE FINANCING WITHOUT W2 INCOME:

A critical element of RE investing is access to good financing; rapid lender approvals and good terms provide an investor significant advantage in winning deals and generating strong ROI.

For first-time investors or those with just a small portfolio, attractive mortgage financing is typically a result of a W2 job and good credit.

Well, I’m no longer a W2 employee. Instead, I own a new business and take periodic cash distributions. Having taken the entrepreneurial plunge just about a year ago, I can definitively say that being my own boss is one of my greatest professional achievements. But, said plunge has also brought new obstacles for my real estate investing, like losing my pre approval status for traditional mortgage financing. Traditional lenders are highly risk averse and follow a very specific underwriting protocol (see anecdote to this point at bottom of post), and my new employment status fundamentally changed my borrower profile.

Let’s break this down. Traditional mortgage lenders like:

  • Steady, long term employment from a stable employer
  • Regular pay check
  • Low debt to income ratios
  • Liquidity / cash cushion
  • Track record of paying back loans (i.e. good credit history)

Hence my challenge as a new business owner applying for financing:

  • My company had been incorporated for less than a year (far from “stable”)
  • No regular salary (those familiar “pay stubs”)
  • Lower earning profile while business ramps and we invest earnings into growth

Fortunately, I had done my financial homework.

I knew my access to mortgage financing would change when I started my new co, so I reached out to various lenders and my accountant last year for advice. I asked how I could best position myself for mortgage financing considering my new employment status. Here’s the advice I received:

“Develop a regular income record, and generate documentation that lenders are familiar with.”

So, put myself on traditional payroll, right?

Not if you’re a member of an LLC (which I am). With traditional payroll, I’d unnecessarily incur payroll taxes as well as deductions like FICA (social security and medicare), federal and state income taxes. Yes, I in fact made this payroll mistake for a couple months.

Instead, as an LLC member, it’s tax-advantaged to take “gross member distributions”.

The workaround? I put myself on something that “looks” like payroll.

I now take gross member distributions on the same timetable we pay our full-time employee: twice per month. And, I do it using our payroll provider, Gusto. No taxes or deductions, just a direct pass-through.

  • Regular pay check? Yes.
  • Documentation that a lender understands (e.g. “pay stubs”). Yes.
  • Tax-advantaged distribution for an LLC member? Yes.

I’ve now been on “payroll” for 2+ months, and just last week I reached back out to my lenders to begin mortgage pre-approval conversations. This is timely, because I have a goal of purchasing another multi-family investment property in Omaha before year end.

Based on my lender convos this week, I still have more work to do, but I’m on my way. I’ll report on their feedback and next steps in my next newsletter.

The big lesson here is that there are no insurmountable obstacles in RE investing. Stay informed and know your options. Like all things in life, many roads lead to point B. Find the best fit road for you, and make something awesome happen 😉

ANECDOTE: My accountant told me a story about one of his clients who owns an LLC and makes $5mm+ per year…and still couldn’t gain access to traditional mortgage financing. His client therefore had to acquire the property in cash, “season it”, and then obtain a mortgage. Crazy.

All equal before a wave
We’re all part of one great human community. How do you reinforce this value?

Thanks for reading!

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