Hey all, we have been 'playing' the real estate game (on a very basic level) for a few years now. All we have been doing is buying cheap(ish) blocks of land in high growth areas, building a house on it and selling it 12 months later. We have moved into each property to avoid capital gains. So far, so good. Our last property we made $80,000 clear profit.
We have now bought the property we want to stay in forever. This has changes our rules and I would like to step it up a little now. We have a significant amount of equity in our PPOR but are self employed with 3 children.
My question is – how different is it going to be for us now that we are self employed? (the last loan we got was when my husband was in full time employment and this last purchase was a direct transfer of mortgage).
When people talk about 'gross income' – this is different for business yes?
Thanks in advance,
Jess
Jess as long as you can produce last 2 Year Tax returns for your husbands business you will be treated exactly the same as anyone in PAYG employment.
Lenders however take your Net Taxable Income for serviceability.
If not the number of lenders reduces but again not unsummountable depending on what documentation you can provide and whether husband is in the same line of work.
Richard Taylor | Australia's leading private lender
Finance for the self employed is very complex. You would really need to show your financials to a good broker for them to be able to work out which lenders you qualify with and how it would all work. There are factors to consider such as:
* Is your husband a contractor with no employees & no major expenses? If so then a much shorter time in his current role would be fine with some lenders as they would assess him as being PAYG.
* Has your husband been SE for a minimum of 2 years, if not then many lenders will not accept him.
* Different lenders assess income in different ways. Some take the most recent years income, other average the two years. There are also some expenses he has which can be added back.We have been in business since April '08, as you can imagine that tax return wasn't awesome. Then the '09 return wasn't grand either because of the set up costs – lots of capital purchases etc.
The '10 return will be better (around 45k clear) but that is for both of us (we are partners in the business) and we have 3 children. On the up side we owe $220k on our PPOR but it has been independantly valued (by the bank) at $390K. This is because of the money we have made in RE previously.
I spoke to one broker who said "Most lenders will want to see 2 yrs financials to judge your income. The most they will take is a 20% increase from one year to the next."
Not sure I understand this – so the banks won't accept it if the business has grown (in income) more than 20%?
That is right most will not accept it more than a 20% increase. There are two lenders that just use the most recent years income. However if you are looking at $45k between you then I think a low doc loan may be the only option. You can read more about how lenders assess self employed income here.
The rationale behind this policy is that if your income fluctuates significantly between years then it may just go back down again. It isn't fair, however that is how most of them do it. Most would only use 120% of your previous years income.
I dont believe under NCCP a lodoc loan would be applicable as you have already stated you have completed your 2010 Tax Return and it showed a Net Profit of $45,000.
There is no justification to then go and state a higher Net Income merely to qualify for a larger loan.
Richard Taylor | Australia's leading private lender
Hi Jess,
Some lenders will take more than a 20 % variance on your figures upwards and use – but needs to be explained logically – ie 1 st year had XXX amount of set up expenses, and as a result of our business plan we have expanded our service area, and increased revenue as forecasted" – the lender may even pas out from shock at someone having a business plan!
All I can pass on that I can guarantee will help – is you can't have your cake and eat it. ……Meaning – if (not saying you do!) you want to stick cash in your pocket, run all your personal expenses via the business, and let your accountant encourage you to 'buy new vehicles & spend up big to minimize tax' you really are not doing yourself any favours at all – IF you want to be borrowing money anytime soon.
Run a tight ship, knuckle down this financial year, and late 2011 will look better, and come around quick.Cheers
I’d disagree with Otta that self employed deals are complicated. In some cases yes but for most small family businesses they are very simple.
The average of two years and the 20% growth rule discussed above is more of a generalisation. It is simply a trigger to ask some more questions to make sure you understand what is driving the growth. If it is reasonable to assume the growth will continue you can look at using the later year, interim accounts or in some cases projections (needs to be very strong to accept projections).
You can’t simply choose not to provide returns if you have them; and simply declare a higher figure on low doc to get approved. I don’t care who the lender or broker is; this won’t be accepted by any lender; only dodgy operators who opt to withhold information from the lender.
In many cases a requirement of a low doc application is an explaination as to why the tax returns are unavailable; saying you had them but choose to not supply them is not acceptable. If your banker or broker tells you this is an option; they will be making up a reason the financials are unavailable for the lender…
Thanks for your replys!
We haven't actually had our '10 financials done yet, the $45K figure has been lifted off my MYOB accounts (I keep very tidy books). Does this change the low doc thing? I don't want to do things dodgy, would prefer to wait if that is the case.
Would it be better to go straight to our current bank instead of a broker? We have been with the same bank for years, have never been late on any payments and have had all our accounts (including all the business accounts) with them. I did a business plan for them back when we started (in '08) to try to get a business loan but that was knocked back. We started the business anyway and have been (relatively) successful.
Just wondering if our history would be a plus with this lender in particular or whether we should try to play the field of lenders.
Just another question – we will be lending money for an active investment (we will be actively increasing the value of the property) then selling quickly. Will the banks look at the engineers feasibility to see that we will be making money by doing this or do they not take on those sort of risks?
Again taking the figures from MYOB or any other Accounting program will still show your Net Taxable Income for 10 as $45,000 or less so a lender wont take any other figure into consideration (ignoring Depreciation and non recurring expenses).
Clearly from this declared income there would appear to be insufficient income to service the required loan with 3 dependants.
Any lender that approved the loan on this basis is clearly acting not in your best interest.
The fact that the loan will be short term as you wish to reno the property and then onsell it will not go in your favour.
Richard Taylor | Australia's leading private lender
v8ghia wrote:Hi Jess,Some lenders will take more than a 20 % variance on your figures upwards and use – but needs to be explained logically – ie 1 st year had XXX amount of set up expenses, and as a result of our business plan we have expanded our service area, and increased revenue as forecasted" – the lender may even pas out from shock at someone having a business plan!
All I can pass on that I can guarantee will help – is you can't have your cake and eat it. ……Meaning – if (not saying you do!) you want to stick cash in your pocket, run all your personal expenses via the business, and let your accountant encourage you to 'buy new vehicles & spend up big to minimize tax' you really are not doing yourself any favours at all – IF you want to be borrowing money anytime soon.
Run a tight ship, knuckle down this financial year, and late 2011 will look better, and come around quick.Cheers
I so get the having your cake and eating it too. It seems you can do it two different ways – one way you don't pay much tax but can't borrow, the other you pay lots of tax but may be able to borrow.
I think I've worked out that we won't be able to borrow. So now I'm looking at forming some sort of syndicate.
Could I access the equity in my PPOR for a deposit and have someone else (with lending power who doesn't have a deposit) get the loan for the property.
What are the pitfalls of syndicates?
If someone else takes out the loan then they will want to be (and the lender will insist) on Title.
This then means it is not your PPOR and could be an IP for them.
They and you loose the Stamp duty concession, may incur CGT and also Land tax depending on the land value etc.
I would do a search on Sydication and read up on some of the problems involved and also ensure you are fully compliant when it comes to advertising for funds.
Richard Taylor | Australia's leading private lender
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