Financing Your Investments on Your Own Terms
Using a credit card is the most common way to build credit, assuming that you pay for what you buy with a credit card. Having a strong credit background can be helpful when a good investment comes along that you want to act quickly on, or not have to rely on other financing.
If you cannot qualify for one of the most recognizes cards like Visa or MasterCard, you can start to build good credit with a merchant card that may be easier to qualify for than Visa or MasterCard. Apply for a credit card at a merchant like JC Penney, and be sure to use it consistently over time, being careful to stay in good standing by paying the bill each month.
If you have trouble qualifying even for one of these cards, a “secured” Visa or MasterCard might be your best bet. These are applied for with an application, and are secured with your deposit, which purchases are drawn from. These work very similarly to debit cards, but can help you establish a positive credit history.
When an good and sound real estate investment comes along that requires a deposit or renovations, you can use your credit cards as a way to act quickly (because you don’t have to take the time to jump through a lenders hoops), or as a way to get around lenders not wanting to lend to you. The disadvantage of this approach is that the interest rates on your credit card are likely to be much higher than the rates you can secure through a mortgage broker, or even through a personal line of credit such as a home equity loan. Credit card companies almost always charge higher interest rates on cash advances, and most even tack on a fee that is a percentage of the cash advance.
While credit cards can be a quick and autonomous way to securing financing for investments, there are disadvantages besides the high interest rates. Most investors who are using credit cards to front their investments are doing so on their personal credit card. Whenever possible, it is crucial to separate your business finances from your personal finances, in attempt to limit your risk. When loans are made in the name of your business, it limits the risk to your personal assets such as your home. Be careful about using personal lines of credit to secure business funding because if the business investment doesn’t pay off, you will be personally liable for the debt.
Another pitfall to think about is the fact that, when an investor is eying an investment, all they can see is the potential return. They rarely can envision losing money on the investment, or even just breaking even on an investment. Borrowing money at high interest rates raises how well the investment has to do in order to earn you a profit. Borrowing money at a high credit card interest rate (such as 18%, which is common for credit cards) makes sense if the return return on investment is 50% or 100% – this is common sense and easy math. The difficult part is discerning which investments are very likely to give this kind of return.