How to Outsmart the Banks when Borrowing

BankerLast week I interviewed Albert Bui from New American Funding. Albert is a senior loan consultant who works primarily with investors and more importantly, he is an active real estate investor in Washington and California. I learned some interesting loan application strategies to increase my acceptability. For instance, many real estate investing structures involve the use of an entity to manage investments. In exchange for services, the management entity is paid a management fee that is deductible to the invoiced entity. The benefit is the reduction of income to the investors 1040 as the management fee is an expense. The drawback from a borrowing standpoint is the reduction of income to the investor. The management fee is typically paid to an entity taxed as a corporation (C or S). This fee is expensed out by the entity, and none of the income shows up on the investor’s return. Thus, in certain situations you may be better off not paying a management fee if you are actively purchasing a property. Look to reduce your income by claiming higher depreciation (possible cost segregation analysis) as depreciation is added back into your income for borrowing purposes.

I asked Albert to provide me a list of questions after the interview to help investors gauge whether the loan officer they are working with understands real estate investor issues. He provided me the following list and indicated an experienced loan officer should be able to answer or assist with the following:

  • What are interest rates determined by? (mortgage bonds generally)
  • Have you worked with real estate investors before? And in what scenarios?
  • Are you able to help me proactively plan my finances in advance of “needing,” any financing today so that I will be able to obtain funds when needed?
  • Are you familiar with tax planning and do you have experience working with accountants on a professional basis? Please provide some examples of how this has helped investors be better off.
  • Are you currently working with attorneys on a professional basis? Please provide some examples of how this has helped investors be better off.
  • Do you currently invest in real estate?

If you would like to listen to the interview, you can do so below.

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