All Forum Posts by: Scott Trench

I've noticed that a lot of people on the site come on and ask about how they can get started investing with a poor credit score and if that score even matters in real estate.

I'd argue that it does. I think it makes one heck of a difference, and I believe that because it was just so easy for me to get financing on my first deal. All I did was apply for an FHA loan (a type of financing that probably makes sense for most people applying the "How to Hack Your Housing" strategy, and who also don't have tons of money for a full down payment plus repairs). After one 30 minute meeting, the lender confirmed my income, balances, and credit score - and then gave me a TON of money to buy this property.

Change one variable in that equation, my credit score, and this becomes a nightmare.  Nobody would have touched me with a ten foot pole if I had a rotten score.  And the funny thing is - I've only been building credit for a little over a year!  It's the difference between being able to buy almost any house, and only being able to buy a fantastic deal, AND having to convince private investors to back you.  I think my way is MUCH easier, especially when getting started.

From my personal experience, the biggest takeaway I have is that the only thing that really matters with regards to your credit score is not to screw it up!

Maybe this was obvious to everyone already, but thinking about this led me to the following conclusion:

My Credit Score is just as important as my reputation, and should be treated with equal importance.  

If you have a bad driving reputation, I would never let you borrow my car!  That would be foolish on my part.  The only way you could convince me was if you made some sort of demonstrable change and then... stopped crashing!  It's the same thing with building your financial reputation.  

So what's the fastest way for someone with bad credit to improve their score?

Stop missing bill payments, cut expenses or increase your income, and start paying those bills!

What do you guys think?  Is credit score very important in your financial background?  Who's come back from a bad score - what did it take?  

Wow, am I learning a lot here. This is fantastic - I think that this example demonstrates the amazing power of strategically deploying tax deferred retirement plans. Truly amazing. Thank you for your input and I will certainly be developing this strategy as I grow my REI portfolio going forward.

Brett,

I too am starting my investing career with the house hacking approach. I plan to put in some sweat equity while living there, and renting out the other half of the building (a Duplex). I think its a great way to get started in REI with relatively less risk than jumping straight into a true investment property that you manage remotely!

-Scott

 Sean,

As a youngster one year out of college, I am buying my first duplex (owner occupier) and plan to close in the next two weeks.  I also max out a 401(k) and would like to max a Roth, but won't be able to quite do all three this year ;).  I believe that the 401(k) is extremely fast and an extremely important tool for newbies and experts alike for the following two reasons:

1) It reduces your tax bill this year - at $100,000 joint salary, a married couple contributing $17,500 reduces their tax bill by $4,375, which in essence can be thought of as a direct contribution to their net worth - a 25% immediate real return even assuming no employer match.  Further, even in an index fund, if you get 7% on average, this totals to a 32% return your first year tax free.

2) You can move 401(k) funds into self-directed IRAs and still invest in Real Estate with 401(k) money.  I find it difficult to believe that most newbies can beat the 32% return I describe above while working a full time corporate job, but if they do quit and invest full time or become self employed, they can certainly use the money towards those super profitable real estate investments.

 Jon,

Here I use 401(k) somewhat interchangeably with "tax deferred retirement plan".  Why not invest in one of these plans, and then go for that fund with the 20% return, or real estate, etc?  I get to become an accredited investor sooner, which gives me access to the fund, and as a bonus, my money grows tax free.  Sounds like a pretty good plan to give you the most opportunity the soonest!

-Scott

Ben,

That's a big goal you have there of $100,000 per month.  Best of luck!  There's definitely opportunity out there.  

One thing that you may consider is that in Colorado, it is tougher to find the kind of properties that you might need to find to generate huge levels of cash on cash return.  You may want to look elsewhere (like Milwaukee or the rural south), or take advantage of the Colorado market by flipping and forcing appreciation!

-Scott

Guys - this is a great discussion! I'm learning a ton from everyone. I guess that for me I keep coming back to this concept:

My goal is to maximize my total net worth and the assets I control as rapidly as possible. I believe that the 401(k) and tax deferred retirement accounts enable me to control more assets more rapidly at a younger age in life. I guess its sometimes tough to desscribe why that's so important - I simply feel that having accumulated wealth rapidly, even in a 401(k) that I can't spend for personal leisures, I will have access to opportunities that are not available to those of lesser net worth.

Again, my financial goal is simply to increase the net worth of Scott Trench as rapidly as possible, to control as much money as possible, and to reap the benefits that high net worth brings.  To that end, the tax deffered savings and immediate tax break today make the 401(k) an unbeatable way to protect my hard earned dollars, even without an employer match.

@Walt Payne 

I am 100% in agreement with your post. One point you make is that most investors can easily have a solo 401(k), and that this money can be transferred from an employer 401(k). This is huge. It means that you can save big on taxes during a working career, and still employ funds when you decide to go out as a full time REI!

It's the fastest way, in my opinion, to build a sizable portfolio to begin an REI career!

@Richard C. 

Thanks for the comments! With regards to the Roth IRA, I personally think that the math works out better for most Americans with the 401(k) contributions first. It's the difference between a dollar towards net worth now, vs a dollar later. The 401(k) immediately reduces your tax bill.

That said, a Roth is also a great way to invest, I've just personally prioritized the 401(k)  because my goal is to rapidly accumulate as much net worth as possible today.

A recent article that I wrote on the BP blog received some criticism because I suggest that a 401(k) is one of the best ways to increase your net worth.

This strategy was criticized by a couple of readers and I thought I'd move the debate over here.  So here's my argument:

A 401(k) allows you to invest and grow your net worth tax free.  It reduces tax liability now, enabling you to have a huge portfolio to invest that will achieve outstanding returns for the lifetime of the account.  In my opinion, this is absolutely critical and its a real shame that someone would forgo the opportunity to take advantage of this tool.

The main counterpoint to this thought process is that the funds are not available until 59.5, and that they are taxed when they are withdrawn.  

What do you think?  Would you rather build up a ton of net worth through the 401(k) or have less assets to manage, but make them usable sooner?

I vote for the 401(k) and increasing my total assets under my name as much and as rapidly as possible.

As a follow up - I would definitely do this through Real Estate, and based on your description, I assumed that $40,000 per year in incremental investments is very reasonable for someone with your corporate experience (likely earning a high salary).