3 Reasons Savvy Real Estate Investors Utilize Business Credit
Many real estate investors, especially new investors, utilize their personal cash and credit when making their real estate investments. These new investors utilize their hard-earned cash and savings for earnest money, down payments, due diligence, attorney’s fees, title reports, and closing costs. Newer investors will also often obtain traditional bank or credit union mortgage loans to finance their real estate investments.
As many real estate investors gain knowledge, understanding, and experience, they realize the limitations and disadvantages of utilizing their personal cash and credit. There are clear advantages that real estate investors that utilize business credit have over those that only use personal cash and credit when making real estate investments.
1. Increased Capacity:
One of the greatest limiting factors for real estate investors is access to liquid capital. Most real estate investors can qualify for a traditional Freddie or Fannie Mae mortgage or obtain financing from a private lender for a mortgage to finance 80% or so of the purchase price of an investment property. Where the challenge comes is securing the remaining 20% down payment and having the additional liquid resources for any additional expenses including closing costs.
Even investors that have the 20% liquid capital for their 1st or 2nd real estate investment, may often become cash constrained when seeking liquid resources for their 3rd or 4th real estate investment and so on. Often times, capital becomes “locked up” in their real estate investments, and their capacity to continue purchase additional properties become constrained.
This lack of capacity can affect both Fix and Flip and BRRRR real estate investors.
What business credit provides is an additional source of liquid capital. Even if real estate investors have significant cash and liquid resources, building business credit provides another source for borrowing and building credit and can result in substantially increased capacity for astute real estate investors who utilize this strategy and source of capital.
2. Preserve Personal Cash and Credit:
Real estate investors that utilize business credit and business financing can preserve their personal cash and equally important their personal credit. There are probably too many real estate investors to even count who have sacrificed their personal cash and credit in order to get started in building their real estate portfolio. While real estate investments can be a great source of both building wealth through equity, and cash flow their fix and flips or cash flowing rental properties, many pay a significant cost with their personal credit.
Just a few examples of this are new real estate investors spending down their savings in order to purchase investment properties. While there can be significant rewards, depleting one’s cash reserves and emergency funds can put individuals at great risk.
Another example is utilizing traditional mortgages to purchase investment properties. While traditional mortgages can often have low interest rates, these mortgages show up on an investors personal credit file. The mortgages also count toward a borrower’s debt to income ratio and having two or more investment properties on one’s personal credit report can often make obtaining additional capital unfeasible due to debt to income.
A third example is credit utilization. Real estate investors who are highly leveraged using their personal credit will generally have higher credit utilization ratios than investors who place their properties in LLC’s and utilize business financing to finance their properties. A high credit utilization ration of 30% or higher can lower an investors credit score, increasing the cost of credit both for their real estate investments, but importantly for their own personal mortgages, HELOCs, automobile loans, and other personal loans if and when they are needed.
3. Ability to Secure Properties Quickly
Especially in hot real estate markets, the ability for a real estate investor to secure a property quickly by making an offer and having the appropriate earnest money and/or down payment readily available is crucial in being able to beat out other investors and buyers hungry to purchase homes available on the market. Experienced investors who understand the strategy of utilizing business credit often have an additional $50,000 - $150,000 or more in unsecured business lines of credit and other types of readily accessible capital available to jump on real estate investment opportunities when they present themselves. Those who win in the game of real estate investing do not let lack of liquid capital slow them down. Obtaining business credit, and utilizing business lines of credit, is a key strategy to having the funds available to secure properties quickly and take them off the market first.
Start building business credit for your real estate portfolio today!