REAL ESTATE INVESTORS, HAVE YOU SET UP YOUR UNSECURED LINES OF CREDIT?
What are unsecured lines of credit, how to get them and why?
What is an unsecured line of credit? Simply put, it’s a loan that does not require any collateral or backing. Your credit card is a good example of an unsecured line of credit. Your credit card line is also a revolving line of credit. Which means you can borrow under it, pay it down and re-borrow again up to your pre-approved credit limit, repeatedly.
Unsecured working capital lines of credit should be part of any business, no matter the size of your operation. The practice should apply to individuals as well, for example, to small, or occasional real estate investors, or even real estate agents. Both of the above business groups are often in the position to spot great real estate buying or flipping opportunities and should have the arsenal or wherewithal to take ready advantage of them without having to scramble for extra cash.
If miscellaneous banks are offering you free credit cards with generous limits, sign up! Be careful that it doesn’t trash your credit score and don’t get over-leveraged, meaning do not let your debt get so high that you can’t meet your interest payment obligations. Keep track; know your pipeline of jobs or projects and the anticipated receivables from them, as well as your net cash flow, or available funds, to make sure you can make your periodic or monthly payments. Pay more than the minimum, whenever possible.
Credit cards may in effect be the banks’ answer to “hard money”; the interest rates may be similarly scary; I have seen up to 29% under certain circumstances; more typically credit card cash advances are around 25%. Banks, however, have to be mindful of what’s known as predatory lending, such as bullet payments at the end two years, for example (having to pay the entire amount of the loan in a big lump payment at the end of the loan term). With banks, you can usually refinance and arrange payment over time. Generally, banks are happy if you are making your interest or minimum payments on time.
If you have a good accountant or at least a bookkeeper, who keeps track of your numbers and a good financial person on staff, you could even apply with a bank directly for a proper unsecured line of credit under your business name, perhaps with a much lower interest rate than that of a credit card. Local banks that know you and maybe manage some part of your money for you (e.g. help with any kind of wealth management or investments or simply service your savings or checking accounts) might be good ones to approach.
An even easier form of an unsecured line of credit might be a simple overdraft line on your checking account. Find out what your bank offers. There’s normally no fee to have one and it’s great to have in case of shortages in the account, emergencies, simple mistakes or to take advantage of opportunities. Ask for an overdraft line for your operating account and use it! Some banks still impose fees if you overdraw the account; others just notify you and convert the overdraft into a loan that can be paid back over time. The interest rates may not be great, could be something like 18%. If you anticipate a shortage in your account, it’s easy to transfer funds online from such an overdraft line directly into your checking account in advance of the anticipated spending, thus avoiding the overdraft fee. Recently some banks started offering overdraft protection only if it’s linked to your savings account for reimbursement; that is not the unsecured line of credit that will provide you with additional cash, it is more of a secured line of credit, backed up by your savings account. Shop around for a bank that does not do that.
Now the WHY question – why do you need an unsecured line of credit? Just in case. As briefly mentioned earlier:
- In case you miscalculate the available cash in your account and overdraw by accident, you want the bank to cover that, preferably without a penalty. You never want any of your payments to bounce.
- If you need quick funds for an emergency repair, medical emergency or any other event.
- Perhaps to help out a family member (kids?).
FOR BUSINESS OR OPPORTUNITY REASONS, it’s good to have a ready source of funds when you might need them in a hurry, to take advantage of good deals. For real estate investors or flippers, those opportunities are coming. Banks have relaxed their lending criteria to such an extent that unfortunately, it’s easy to see foreclosures on the horizon, in not-too-distant future. Yes, I believe it’s going to be deja vu “all over again”.
Banks are notorious for having short memories when it comes to lending practices. Moreover, many of the current home buyers are first-time buyers, who have not learned their lessons yet. Homeownership is once again available with very low down payments, sometimes zero down, and on occasion, buyers may even get money back! Credit score requirements are not what they used to be, with numbers as low as 500-550 being eligible for FHA loans. Does this have familiar echoes of “subprime”, “no doc” or “junk bonds”?
I am convinced we are heading for a new wave of foreclosures.
I do hope I’m wrong, for that might spell hard times for thousands of home buyers who may be getting in over their heads. That is, they may be assuming debt that is actually in excess of their means down the road or the payment structures are so tight that any glitch might upset the proverbial apple cart (loss of a job, drop in salary due to reduced work hours or injury, new expenses due to a new baby or illness, new car or appliance payments and so on).
Investment opportunities are on the horizon, just like after the great recession of 2007. The proverbial “writing is on the wall”. There may be fewer short sales at the outset, just foreclosures at the lower end of the real estate spectrum. There were, in fact, some “hot” real estate markets, where inventory was low, driving up prices, so there may be some price corrections in those areas, but not everywhere in the United States. Some regions recovered more slowly from the recession and may still be catching up. The current sectors experiencing a housing bubble might be more financially secure this time around, so we may not see the short sales for a while, depending on the job markets and overall economic stability.
Again, if you’re a shrewd investor, always know where you could get money in a hurry. Unsecured lines of credit might be a good source of quick funds for you, so set them up!
For any questions, help or advice, don’t hesitate to email Olga at consultwitholga@gmail.com.
