If you’re self-employed, yes, all conventional lending institutions will want to see at least two years worth of tax returns proving that you’re not just a drug dealer.
You left out a lot of information. Do you plan on buying rental units such as duplex’s and 4 families? Single family homes? Do you plan on buying properties that need a rehab done before placing in service? Do you plan on holding onto these properties, or selling?
Are you looking to build worth via sweat equity (doing most of the work yourself or with partners/employees), or are you looking to be more passive and hire sub-contractors and/or a general contractor to do the work? If you’re doing the latter, why would you need to quit your day job at all? Your profits will be substantially smaller, but you’re also not doing any of the work.
If you plan on working on units yourself, do you have your own tools? I can tell you that you’ll need to spend at a bare minimum of $5000 in tools if you do not have them already.
With all that being said, I can tell you how I started. I started out by purchasing a two-unit duplex in a low-income area for all cash. It was only $25,000, but I also needed $20,000 to bring it up to a rentable condition. As I finished one unit, I immediately rented it out to begin generating income. It took a while as I really didnt have the cash to pay others, had no partners, and did all the work myself. Eventually it was done, though, and I had both units rented out at $565 a month (2/2 duplex). I still hadn’t been self-employed long enough for a bank to give me financing for another property, so I accessed the equity by refinancing. The rehabbed value was now $85,000 according to the appraisal by the bank, and they gave me 75% of that in cash, leaving 25% equity in the house. That amounted to $63750, which I promptly used to buy another 2/2 duplex for $39,000, leaving me money to fix it up. Again, I did it myself, and again, it was worth $85,000 upon completion.
You can see the trend.
Buy a property all cash
Fix it up.
Rent out, and refinance.
Buy another property with funds from refinance.
Fix it up.
Rent it out, and refinance.
Each property you finish will get you another $200 or so cash flow per unit per month. After 5 duplexs this begins to add up fast, as you’ll have an extra $2000 a month coming in as passive income. Passive income is how investors get wealthy, not through rehabbing and selling. Each month those tenants are paying your mortgage down a little further, andthe cash flow continues to grow.
A reason not to grow too fast in the beginning is that you’ll face something called “seasoning” by a bank. They want to see one full year of rental income reported on Schedule E (rental income form) from a property before they’ll consider it an “asset” of yours, rather than a liability. Until a property is seasoned most banks will not factor in any income generated by rents, and they’ll view the value of the unit as whatever you purchased it for, not the fixed up price.
Many investors top out at 4 properties, and this is one of the reasons.
It is good that you’re planning this thing out, though. Another thing you’re going to want to take into account is the tax ramifications of being self-employed. In addition to ordinary business income taxes, you’ll also pay 15.3% in Self Employment tax. There are whole books written on real estate taxes and deductions, and how best to structure your holdings as a landlord. This is also something you should learn about before quitting your day job.
If you’re really gung ho and do not have the cash, a hard-money lender will lend you money at a premium interest rate on a per property basis. (They wont just give you a line of credit or unsecured loan). This may help you get started until a conventional lender will finance you.
Another route may simply be to take out a HELOC (Home Equity Line of Credit) if you’re already a homeowner and have established an amount of equity or experienced a lot of appreciation since you purchased. A LOC (Line of Credit) is the most flexible and desirable option, as you only pay interest on the amount of money you currently have on the LOC, whereas if you refinance you must pay the interest on the entire amount loaned, even if you aren’t able to reinvest it all.