paying self from own company for loan purposes? - Posted by Mark from Pa

Posted by youngsterz (UT) on February 20, 2002 at 09:21:52:

Showing income from your business is only to your advantage if you actually want to show some income for loan qualifications! If you want to do what you can to get the loan, I would definitely say yes. I also think it depends on how your loan officer wants to structure it. I have a great officer at Wells Fargo who understands and thrives on creative finance. She isn’t just filling out paperwork. And it’s not “Enronitis”, because they base it off of the Schedule E from your tax return, and current lease contracts. That serves the same purpose as a regular pay stub from a regular job.

I recently quit my “regular” job to be a full time investor. I thought I would have to do a stated income loan from now on, but I got my last loan, two weeks ago, showing my income from my job as a full-time investor, and as the president/principal/managing partner of my LLC. Now I’m charged to go find the next property and do it again!

Other income/tax note (with disclaimer: I’m not a tax accountant, so confirm this with one): The income from an LLC is already being documented in the Schedule E. If you plan to be a full time investor, and make more money from buy/sell than you do from owning/managing your own properties, then you should consider incorporating as an S corp/sub S corp/Professional Corporation. There are greater tax advantages that way. Consult your accountant.

I have an LLC for my own keeper properties, and will be forming another LLC soon for additional properties (risk diversification). But, I also recently got my real estate license as well, to aid me in my own real estate investing, as well as make a commission on sales to other investors of properties that don’t fit me, but may fit them. (I focus on investment properties). I incorporated for my real estate business (as a Professional Corporation because of my status as a licensed professional) and the advantage is that you are able to declare a portion of your income as salary, subject to the 15.3% self employment tax, and declare the rest as a dividend of the company, which is only counted towards your Gross Income. And if you have a ton of depreciation expense from your properties, then you should be well sheltered for your Gross Income, and should be able to avoid most or all of the taxes on that declared income.

That beats the heck out of paying the 15.3% self employment tax!

This isn’t illegal, or “Enronitis”. It’s called the U.S. Tax Code, and any serious investor has to learn how to play the game, by the rules that have been set by the good old government. Remember: the tax code has mostly been set to benefit the rich. So use the code to your legal and constitutionally guaranteed benefit, and become one of the Good Old Rich Boys!

God Bless America! (Whew! I’ve been watching too much of the Olympics. Gets me all patriotic. . . .)

paying self from own company for loan purposes? - Posted by Mark from Pa

Posted by Mark from Pa on January 26, 2002 at 01:56:56:

Hi everyone,

Well that subject sums up my question pretty well. I am not interested in the actions needed to make such a company, but am wondering if creating one (such as a property management) and paying yourself is considered fraudelent? We all know bankers love to see that pay stub to justify their loans. I realize in doing so, I have to report my income as a business and pay taxes fica, unemployment, etc etc, but is this route moral and legal? If they aren’t going to take into consideration my income from my investment properties, I need to show income in another manner then. Has anyone done this before?

Thx for all replies

Mark

Re:paying self from own company for loan? - Posted by del

Posted by del on January 28, 2002 at 16:30:44:

here’s my thoughts…
IF, you are ACTUALLY drawing a regular salary,(instead of plucking false wage statements created out of air) and you did it in a structured business entity (of which you are an employee)
Why wouldn’t you be able to present pay stubs. Now depending on where
you are at, Maybe the bank would research the company
ownership ? Or if you do it as a home-based business
just need to produce tax returns, possibly.

In a Nutshell, in my opinion, not an ethical or fraudulent problem.
Just as if you worked for ie. "Properties Are Us"
as a management rep.
If you decided to find out about some excellent resources relating to business structuring
send an e-mail to structuringbiz@hotmail.com
good luck, del

Re:paying self from own company for loan purposes? - Posted by Paul S

Posted by Paul S on January 26, 2002 at 09:25:59:

Can you spell Enron? Enron executives, it now appears- though it isn’t proven yet, may have set up corporations in their own names and then taken loans from Enron itself so that Enron could list them as “assets”, and thus boost Enron’s ability to borrow more and more money. What you are suggesting is a similar shell game. It may be legal, I don’t really know, but it certainly isn’t ethical to try and “trick” the bank into thinking you earn money, or have an income stream that you really don’t have. There are so many creative ways to “cook the books”, but I wouldn’t do it if I were you. If you have to stop and ask “is it wrong?” there’s probably a little voice already telling you “It sure is.”

If you actually managed properties and had actual earnings- that would be a different story. Have you considered that?

Re:paying self from own company for loan purposes? - Posted by youngsterz

Posted by youngsterz on February 18, 2002 at 24:42:48:

I have my properties set up in an LLC, with myself listed as the managing partner. Then my favorite creative loan officer (at Wells Fargo, no less!) uses my income from the LLC as my income for loan qualification. I recently quit a well-paying job to do REI full-time, and I closed a 90% LTV loan on a duplex two weeks ago with my LLC income, and a debt ratio of just under 50%. Of course, a great credit score helps a lot.

Side note: I think it is easier to sell such a thing to a bank or mortgage company who plans to keep their loans in-house, instead of reselling. A lot of mortgage companies will shoot down stuff because they can’t make it attractive for resale. Places like Wells Fargo or Washington Mutual keep their loans, and can be a little more reasonable to the investor.

Re:paying self from own company for loan purposes? - Posted by Paul S

Posted by Paul S on February 20, 2002 at 08:49:20:

That is an excellent tip about the lenders. I honestly never thought about the resale aspect of a loan- makes perfect sense. So, getting back to the topic- it is to your advantage to claim the money as income?