Debt Servicing - Forgotten Income

[Hero]

Like may investors I am about to hit the debt servicing wall. I have an accepted offer on the table at the moment which is conditional upon finance. I know I'm close to the Banks servicibility limit after having supplied them with my financial information re my and my wifes income.
I know the ratios they set can be quite sensitive to small changes in income so sometimes it doesnt take many $ to be a pass or a fail as far as the bank is concerned.

I have one tactic up my sleeve which I will use if I get declined this time based on the numbers I have suppied so far and will be interested to see if it works.

I have a portflio of properties owned by LAQC's. My wife and I manage the properties ourselves and do easy maintenance etc. For our trouble the LAQCs pay us a shareholder/employees salary of around $15000 per annum.

I 'forgot' to put these salary earnings into the figures I provided the bank.
So I intend to show them the salaries declared on our tax returns to show that in addition to the salary I have stated there is a further $15,000 salary we have earned which should be taken into account. I even have a bill from the IRD charging us tax on it. What more proof could they need?

So even though this smoke and mirrors is me paying me I can quite legitimately declare this $15000 to the bank as income for them to take into account.

Just a thought .

Any opinions?

Regs

[kolzee]

Hi Regs,

I don't have a definite opinion on whether this is legit or not but i do think that you should test the water with one bank first by telling them the detail. If they do not accept it then you should think carefully about whether you should apply to another and keep this from them.

After all, this is the type of action that will cause banks to really go after you if the proverbial hits the fan. What you need to consider is that your LAQC company provides protection unless you, as a director, do not make suitable decisions. In this case you personally will be liable and this has huge consequences - to me not worth risking on an extra purchase.

Finally, i think that you should be considering what type of purchases you will be able to sustain ongoing. If you buy places with sufficient yield for example, you may be able to buy places ongoing.

Bear in mind though i'm an accountant so naturally risk averse in nature!!!!

[hawkeye]

Hi Hero,

Don't expect any Bank to be logical. They might well count your 'income' twice in the manner you suggest.

I know of a case where two divorcees wanted to refinance the jointly owned family home with another Bank. One partner paid the other a substancial amount of child support. The Bank in question wouldn't count the Child Support payments as income for the recipient but insisted that the payments be deducted from the payers disposable income.

Where is the logic in that!!! If the payment is made then joint applicant A has the money and if it is not paid joint applicant B retains the money. The Bank turned down the application as it didn't meet their servicing criteria!!!!!!!!!

Got to love people that travel blindly by the 'rules' without applying common sense.

[RentMaster]

Hi Hero.

If your LAQC company is paying you a salary which you had not previously told the bank about, then doesn't that reduce the ability of the LAQC to pay the mortgages?
Although it improves your own personal cashflow, it reduces the LAQC's cashflow by the same amount. So I would think that it would balance each other out. I am sure the bank is looking at both the cashflow of the LAQC and the cashflow of you personally. Or am I missng something?

[drelly]

I was sort of thinking the same thing... assuming that the banks have the accounts for the LAQC's, wouldn't the 15,000 be included somewhere in there already?

[Wayne]

Well my bank doesn't seem to want to know about the company finances. Basically they take
- our salaries
- income from other sources that we declare to them (div, interest etc)
- 90% of rents
and calculate it from there. I suspect that they would want to know the source of the $15000 and then assess its legitimacy - after all I could pay my Wife $20000 for services rendered but would they agree that this is income my wife has?

[Hero]

Hero here again.

The banks mulling it over at the moment but they told me they are concerned only with the rental income of the porperties and use a % of that as there benchmark.

They therefore assess a property that uses a property Management co at 8% mgt fee no different than if the property was managed by the landlord.

Even though the respective cashflows are actually different the gross rent is the same and thats all my banker cares about.

Part of the rationale can be put down as this.
If the bank is going to lend me X based on a properties managed for me at 8% which would cost me say $7000 per year then if I choose to manage them myself I have saved my company $7000 of cashflow. I recognise this saving as a salary. It is cashflow/ income I have that I otherwise would not. My gross rental hasnt changed one bit.


Anyway the bank is considering it as I type.
Time will tell....

[drelly]

Ah ok... but you can't take 90% of rents AND $15,000... you're double counting $13.5k of that $15k (90%)

[Julian]

I can't understand your bank not wanting to see the company books if you are buying your properties in a company.
But if they don't, and if you are honestly paying yourself $x for managing your company, or caretaking the properties or whatever, then that is legitimate income that you can honestly declare.
It would be pertinant to declare who the company is, and the fact that you are a director and shareholder of that company.
Banks often want to lend money and if you can satisfy their criteria (that is, get ticks in the right boxes) then it is possible that the money might be forthcoming.
But don't lie, and don't hold any truths back.
Julian.