Self-employed individuals often lack the traditional history of pay stubs that lenders are used to seeing with loan applications. As a result, they can face hurdles others do not when seeking traditional loans. For investors who work in real estate speculation and development, there are alternatives that use your statement of income as the basis for the loan. They are risky, and due to past misuse stated income loans have some restrictions they did not used to have. Despite that, they are still one of the easiest ways to access working capital when you are self-employed or your income is derived from investments.
Risks & Rewards
Loans based on a borrowers statement of income are risky for all parties because if your income changes due to a downturn in the market, your ability to pay could disappear. This was a major contributor to the 2008 housing collapse, so many lenders today do look for some kind of income corroboration like tax returns or bank statements. They also look to attach the loan to collateral, typically a property. That makes them ideal for cash out refinancing when you have income properties with equity in them. You can finance renovations or even your next acquisition with the right stated income loans.
Pay With Your Income
Using these instruments with accurate income projections allows you to set up a stabilized investment that has a managed return, then use it to fund your higher risk speculations. If the payday comes in, you can eliminate the income-based loan entirely and start on your next deal or you can roll the earnings forward, allowing the building to pay off its own loan over time. Adjust your tactics as market conditions change to keep your income levels optimized and your portfolio ready for the next deal you find. There’s no reason you have to treat every loan payoff the same, after all.
Rapid Expansion, Controlled Risk
When you have the option to finance an entire short-term investment project from the equity in your income properties, it is a lot easier to jump on opportunities because your capital reserves go further. The bigger your long-term holdings get, the more short-term projects they can finance. Using one income property to acquire, renovate, and reach a return on another is a great way to build up this base. Stated income loans minimize the capital needed to stabilize those long-term property investments, so all you have to do is figure out when you best move is selling an apartment building to an investor instead of holding it for yourself.