Posted about 5 years ago

Personal Lines of Credit FTW! Using Consumer Credit to Invest

I know I am not really going full time into investing until August 1st, but I had to share this quick story that hopefully inspires you to take a simple action to advance your investing.

I was listening to the BP Podcast episode 134 with Terry Adams on my way to work the other day and they were talking about using unsecured lines of credit to start and continue investing in property. I thought, why not stop by the bank and see what kind of LOC they will give me (i was just there the day before to put my new wife on my accounts. Everyone in the bank loved that!). Just to start gathering my options. 

I did a lot of research on local banks in the area to find out what their limits were on unsecured personal lines of credit and they ranged between $7k and $20k. Not to say I couldn't ask them to increase that but that was what they were advertising. This is also not to say that I would have definitely been approved for those upper limits. 

Around lunch time, I poked my head in my bankers office and asked if he could let me know what he thinks about getting a personal line. He said sure have a seat. As we BS'ed a little, he was plugging away at the computer. Mid conversation he says "how does $25k sound?" to which I said "sure, you think I can get approved for that?" and he replied "Yup, it is already on your account."

Before I even had a chance to consider the option, he had already done it for me. I was in and out in 10 minutes with access to $25,000 whenever I need it at a reasonable rate considering it was unsecured (9.5%). Not that it really works this way, but I was just making $150,000 an hour for those 10 minutes! I would have been upset if he had just done it and I only got a few thousand dollars or something small, but this was above the range I had been looking at and the terms were pretty good, so I was ecstatic that I got so lucky on my first try!  

I now have some float money to help me buy properties at a relatively reasonable interest rate to bridge between acquisition and refinancing to longer term financing. If you have not already done so, I would highly recommend stopping in your bank where you do business and asking what they can do for you with a personal line of credit. While I recommend it, there are some things to consider. 

Why did they approve me?

It was really helpful that I had just made some considerable deposits with the bank, they hold my mortgage on my primary residence, and I showed my face quite a bit in the branch. This is a large national bank and they were still able to do it that easily. I can't imagine how much more I would have gotten with a small local bank!

The timing was helpful too. With me leaving my job in the next few weeks, I am still able to qualify for that much credit based on my W-2 income. If I waited until I no longer had W-2 income it may have been much harder to do. If you are considering leaving your job to invest in real estate full time, you should also consider getting as much available credit as you can that you can use to invest. 

Type of credit matters!

No, credit cards do not count in my rule above! The exception would be a Home Depot or Lowes or similar card that gives you favorable financing terms on material for renovation projects. I recently got a Home Depot card that gives me 6 months interest free financing on any purchase over $299. They also just ran a 4th of July deal that extends that for different price levels and they do that fairly often. Lowe's has a very similar offer on their consumer credit card.

Tread lightly with credit cards! I make it a rule to never pay interest on any of my cards. Make sure that you can pay off the card in cash if you get close to that promotion period expiring. Often they will charge you interest on the whole balance since the beginning of the promotion in one bulk charge. Ouch! If you absolutely have to and get really stuck, many cards will do a promotional interest free period on balance transfers with a percentage fee (most are about 3%). This can be a slippery slope if you aren't very disciplined about it. 

Credit score implications

Requesting $25,000 of credit credit can lower your score, especially if you are opening multiple accounts or requesting it several times in a short amount of time. I have read that you can often get the banks to do a "soft inquiry" which does not show up on your report, but I did not find that to be the case at the large bank I went to. It is worth asking your banker to see if they can run it that way before you formally apply and open the account. 

On the flip side, increasing your available credit by that much should lower your total debt utilization rate dramatically. This should more than offset the negative in your score from the hard inquiry when you open the account. 

Takeaways

The most important things to take away from this post are:

  • Personal lines of credit can give you more access to capital without having to pledge anything as collateral. 
  • Applying for a LOC can be quick and easy. 
  • Start with the bank you do the most business with. 
  • Create relationships with the people in the bank. Even at the big ones. 
  • Get as much easily accessible credit as possible while you have reportable income (within reason of course!)
  • Credit cards are not the same as Personal Lines of Credit! Avoid them if possible, unless they help your investing. 
  • Try to get bankers to run a "soft inquiry" while you are shopping for an LOC. This will help limit the negative effect on your credit score
  • Consider what this shopping and applying for credit will do for your credit. If you ultimately choose not to open a line, you may end up with negative dings on your credit and no positives. 
  • Listen to the BP Podcast!!!

Happy investing everyone! 



Comments (10)

  1. Thank you for sharing Rich.  I've been utilizing credit cards to help cover rehab costs but will definitely try for LC.  Thank you for sharing!


    1. Glad I could help @Michael Laniak! Credit cards can be a little scary with the interest rates approaching 20-30% depending on the card. I only use cards if they have some promotional period or if I am planning to pay it off at the end of the month (to get the points). Good luck!


  2. Thanks for the motivation @Rich O'Neill. Very thought provoking post. I read it and read it again in case I missed something. I just went and took a look at podcast 134. I must say that between this post and that podcast I've learned alot. Salute.


    1. Hi @David Hudson

      Thanks for the kind words! Very glad to hear it was helpful. Anything is possible with confidence and some creative thinking! 

      Best of luck!


  3. @Rich O'Neill

    Great article that I can relate to.Recently went thru similar situation at smaller local bank that we conduct business with.We have a mortgage,checking account with sizeable balance located at this bank. Their terms were different than yours in that they wanted $350 origination fee, 5% interest, and the balance had to be zeroed out one time per year,plus they wanted our personal checking account moved to them.This was for an unsecured $25K LOC. The $350 origination fee was a deal killer for us.Thought it was steep,considering don"t really need it that much. Thanks for the article, and good luck.


    1. Hi Bryan, That is a bit steep. The thing I really don't like is the zero out rule. It is a good idea to do that but I do not think it should be required. It is easy to get around (borrow money from another account for a day then switch everything back etc.) but it is just another headache. The interest rate is really good though. 5% is approaching the rate you would get with your personal residence as collateral. To get it unsecured at 5% is incredible! It may be worth the $350 just for that reason alone. Did they charge any annual fees? If not I would jump on that if I had that deal presented to me!

  4. Great article on a way to approach short-term financing that I had not really heard much about. Kudos to you for going full-time and best of luck!


    1. Thanks @Laura Sulak! It is a little scary but I think it was Tony Robbins who said "to get off the island, sometimes you have to burn the boats"


  5. Great article! I recently began to form a relationship with a new bank & they've already made it clear that they are interested in my business. It's a great feeling. I plan to explore finance options with them.

    Also, great job on "Doing It." It's easy to say you're going to do something like this, but you actually took the step. Congrats on that! 


    1. Thanks Bob! This is my first post to the blog so I am glad someone already saw it and liked it! 

      I hope I made the point clear but one of the things I wanted to emphasize is that it was so easy to just go "do it". It took 10 minutes out of my lunch break. 

      Good luck with the new bank and remember to make it a win-win. If you don't already have deposit accounts with them, bring them over. Go to them first whenever you need any sort of banking help (even if you don't ultimately use their services). 

      Let me know if I can help in any way!