One of the biggest hurdles facing commercial real estate investors is securing the necessary capital to purchase the properties they want. Because most investors do not have regular salaries, and therefore no formal W-2 forms to show banks and other lending sources, commercial real estate professionals often turn to stated income financing to get the capital they need.
Giving stated income financing some context
Whether picking properties from wholesaler lists or simply by driving around town, the price of commercial real estate is often more than most CRE investors have on hand. In order to gain funding, many CRE investors used to take out bank loans to finance their purchases. However, banks are becoming more restrictive in their lending practices and require credit check, financial statements, proof of employment (or business ownership), and paychecks as proof of income. The problem with this is that CRE investors are not on any payroll, per se, and cannot produce a formal statement showing income, federal taxes withheld, etc. For these reasons, the world of commercial lending devised stated income financing.
What is stated income financing?
Stated income financing is a process by which CRE investors work with commercial finance professionals to get the funding they need based on a statement on income. The “statement” is derived from the total sum of revenue a CRE investor receives from property rentals, flipping houses, and other investments. The stated income is taken at face value, in conjunction with the CRE investor’s credit score and borrowing history. This allows investors to close time-sensitive deals that would otherwise be missed by waiting for a traditional bank loan application to be processed.
A word about credit scores and stated income financing
Stated income financing does not mean that anyone can walk into a commercial financing office and claim they make over $5 million (before taxes) and receive money based purely on faith. There has to be something to make a CRE investor a “good risk” – and that is a high credit score. The baseline credit rating needed to receive financing is 600. That number (or above) demonstrates that an investor has a strong borrowing history, and is fiscally responsible when repaying loans.
While stated income financing is primarily used for purchasing commercial real estate, it can be used for much more. Some CRE investors use states income financing to refinance properties they already own. Some financing agreements can offer upwards of 70% LTV on multifamily, office, or mixed-use properties, making stated income financing a solid solution.