5 Things Every Real Estate Investor Should Know About Money and Creditby
“I can help you. Are you looking for a room?” I would reply.
Most of them would shrug their shoulders or smile and then we’d get to business. I’d find out what kind of room they needed, take their cash or credit card, set their wake up call, offer them ice and send them off to their room.
I was very young – younger than 14 – when I started working in my parents 19 room Motel in rural Alberta. As soon as I was big enough to remove pillow cases, that was my job. Then, when I got older, I was in charge of the office when my Mom and Dad were out (don’t worry – there was always a babysitter or my Grandparents in the other room beside the Motel office in the event that something happened – thankfully nothing ever did). I also had the pleasure of cleaning a lot of toilets and making 50+ beds each weekend as a teenager (who knew I was getting such good training for being a landlord because those toilet cleaning skills have come in handy at times…)
Taking a role operating my parents business from such a young age opened my eyes to a lot of things around business and money. My parents also taught me about saving and credit cards, but I still had a lot to learn when I moved out at 17 to go to University. My biggest issue was that I didn’t use enough credit, so when I went to buy my first property my score wasn’t as good as it should have been for the simple reason that I didn’t use credit much at all. I only had a student loan and a $500 limit credit card that I barely used.
Based on all the credit checks we did in August to fill seven units – and the sheer volume of people in their 20’s and 30’s who have major issues with their credit – I know I was fortunate to know a lot more about money when I graduated from high school and set out on my own than most people seem to know. And, considering you’re investing in real estate, your credit score and how you manage your money should be a critical component of your plans.
5 Things Every Real Estate Investor Should Know About Money and Credit
#1 Good credit scores matter for more than just applying for loans.
Many people think that the only people who check their credit are banks and landlords, but there are an enormous number of companies that check your credit score for varied reasons. Everyone from a mobile phone company to a potential employer could be checking your score. If you are going to be taking a job where you’re touching money it’s fair for a company to ask for permission to check your credit. If you’re not responsible with your own money, should you expect a company to trust you to take care of theirs? And, of course, a savvy money investor is right to ask you for your credit score before they enter a joint venture or lending agreement with you too.
# 2 Good Debt vs Bad Debt.
All debt comes with a price – and I am not just talking interest rates.
I am not a fan of thinking there is ‘good’ debt. There is better debt, but debt creates stress and can be a significant burden even if it’s for ‘good’ reasons so take on debt carefully. If you choose to change careers or go back to school, your debts will weigh heavily on your decisions. In fact, many people will avoid doing the things in life that will really truly make them happy because of debt burdens so choose wisely.
Good reasons for debt, in my opinion, include training, education and other expenditures that will lead to an income. Buying an investment that will generate enough income to pay for the debts (and leave you with a cushion aka positive cashflow) can also be a good reason to take on debt. Bad reasons for debt include taking expensive vacations , buying a bigger home than you need just because you can qualify, new vehicles, boats and toys.
Just because you can afford the monthly payments does not mean it’s debt you want to take on. If something changes with your job or your income drops these are the kinds of debts that will choke you and your credit score.
#3 Use Your Credit.
This was the biggest surprise to me. When I applied for my first mortgage in 2001, I expected that my score would be 800 (the highest number possible). I don’t remember my exact score but I think it was much lower than that – maybe 680 – not because I’d been bad with credit but because I didn’t have enough credit history and had not used enough types of credit.
When I graduated from University, I kept living like a student (no cable tv, no new furniture, bagging my lunches for work) so I could hammer my debt down as quickly as possible. I did not spend money I didn’t have. I barely used my credit card and when I did, I paid it off immediately. My problem was not credit abuse, it was that I needed to show more responsible credit usage. Getting a mortgage and line of credit made a big difference (part of your score is based on the credit you have available so if you have lots of room on your line of credit that is a great thing for your score, but the more you use it and the less room you have on it, the worse it will be for your credit score). Bottom line, don’t be afraid of credit, as you need to show responsible credit use of different types in order to have a strong score, but make every payment and use far less credit than you have the capacity to borrow.
#4 Create a Budget and Stick to It.
My parents laugh whenever I talk about budgeting. When I moved out of home to go to school, I called my parents, rather upset, and said “I did a budget and it won’t work – I need more money. Can you help?” I had worked two jobs in the two summers before University – working in their Motel and as a lifeguard – and my Dad had helped me trade in Gold stocks to make a good return on the ‘pop bottle’ money from the motel they’d saved for us, but my monthly living allowance was too tight with the high cost of books, tuition, rent, and food.
Mom and Dad helped me cover the short fall, but they still make fun of Julie’s budgeting and how I just find more money when the budget is too tight. It’s sort of true – I’m a conservative spender but I’ve always looked at how I can make more money rather than focus on cutting back too many expenses. At the age of 17 with a full course load ahead of me, my solution was to ask my parents for money. 🙂 These days I still try that route but usually I’m better off to find a way to increase revenues in one of our businesses.
As much as my parents make fun of me for that, they will also tell you that once I made that small but important upward adjustment to my cash inflow, I stuck to that budget. When you have a limited income you have two good choices, spend less or make more. The other lesser option is to dig into a deep whole of debt and that is a hard one to climb out of.
#5 Have a rainy day fund (or as we call it in real estate – a reserve fund).
The Wealthy Barber is a great read for all students and adults alike. It inspired me to keep living frugally when I was done University and starting hammering on my debt AND saving. I didn’t quite achieve a 10% savings rate but I did set up a system where a certain amount of money came straight off my pay cheque every month into a savings account. That way I never saw it. After two years of doing that, and of saving half of every sales bonus I earned, I had $16,000 which is what I used to get into real estate investing at the age of 24. I chose saving and investing over buying a bed, cable tv and other things that weren’t getting me where I wanted to go (yes, I spent two years sleeping on a foam mattress on the floor).
Seven years ago a friend of mine was asking me about my real estate investments. At that time the only thing she owned was her car and she is a year older than me. She was a sales rep like I was out of University so she was quite puzzled about how I’d managed to buy so many properties before I was 30. She asked “What were you making as a sales rep back then?” When I told her my salary she was shocked because she actually had made more than I did, but she’d spent it. She didn’t know me then, but she probably would have been a little shocked to see how bare my apartments were back then too!
To this day I spend very little on stuff. I invest a lot of money on training, education and mentoring. I also put money into experiences like our trip to Africa last year and my upcoming trip to Italy with my Dad. I also save money every month for the rainy day fund. Just like every property needs to have extra cash on hand to handle problems that come up, so do you. Or, maybe just so you can take that trip you’re dreaming of and do it without borrowing any money to do it.
Too many of our tenants have giant flat screen tvs and garages filled with junk yet they struggle to pay us rent sometimes. Many people are left renting the only homes that don’t check their credit scores because collection agencies are haunting them. And others are wondering why they can’t get the best rates on a mortgage because they have never used a credit card in their life.
Maybe you weren’t as lucky as I was to grow up cleaning toilets and giving customers buckets of ice, but now you know and now you can share what you’ve learned with your kids. Getting control of your money and your credit young will help you tremendously as a real estate investor AND it if you take the time to teach your kids these lessons, they’ll be ahead of their class when they leave home to start their own independent lives.
1st Image Credit: Julie Broad
2nd Image Credit: © Alain Lacroix | Dreamstime.com
3rd Image Credit: Amazon.ca