Episode 194: How To BRRRR With Bad Credit

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Mike: How to BRRRR?

David: How to BRRRR.

Mike: Let’s talk about BRRRR baby.

David: Let’s talk about how to BRRRR.

Mike: BRRRR. So, normally we’re talking about wholesale, we’d like to talk about BRRRR as well because it’s something that we’ve done pretty successfully. We’ve acquired around a hundred properties in about 2 years together and again, we’re pretty proud of that, we wrote a book about that called ‘The BRRRR Method’: the ability to basically create a rental portfolio with nothing out-of-pocket. So, we are pretty excited about that, pretty passionate about that strategy and we’ve gotten a few questions about it from readers of the book and from people who have seen us talking about it in the past on podcasts, so we wanted to talk about that again today. So what is BRRRR? real quick. BRRRR is an acronym for buy, rehab, rent, refinance, and repeat. And when we buy our properties initially, we typically use a private lender. So, we’re going to use someone else’s money to buy it upfront and this is advantageous for us twofold. One, we’re not using our own money so again, that’s an advantage. Two, when we go back to refinance it at the very end of this process, we are getting a rate and term refi, or it’s just looked at differently than a cash out refi because it’s not just all of our money in the deal. So, we’re refinancing it, we are not really cashing out our equity in the property. So again, it’s very- it’s advantageous for us to do that. So that’s- our suggestion is you probably want to do that, either use- you can use hard money lenders, you have to have almost no relationship with them ahead of time and they’re going to be able to loan you money based on the asset- the hard asset which is real estate as opposed to looking at your credit. So, one of the more specific questions Dave that we got was how do you do this if you don’t have the greatest credit? Well, it is tough.

David: It’s very challenging.

Mike: It is tougher and there are a couple things you can do. So, we always recommend- we actually in the book, if you check out our book is uhh we make a joke that it should be PBRRRR, you know like P-B-R whatever the [inaudible] PBRRRR. So, it should be prequalify, so that P should come first for pre-qualify.

David: Yeah, that’s exactly right.

Mike: Before you buy and the reason is because it is so important that you’re able to get that refinance, that long-term loan in place at the end of the day and if you embark down this road and you can’t, then your only option would be to sell that deal and quite frankly most of the people who want to be real investors don’t want to do that. Now, you could make a nice 15, 20k profit if you do everything right which would be great, you know, then you’re a flipper but again, that’s not going to get you closer to that passive income that rental portfolio that you’re trying to build. So what do you do? We are very-

David: So, to get in the game- Let’s say this though.

Mike: Go ahead.

David: To get in the game right away, one option will be to take on a partner, somebody that is bankable, right?

Mike: I love it.

David: I mean, that would be the first thing I would suggest if you can’t get a loan because in order to do the BRRRR, you have to buy typically, you know, that could be a number of ways, private money, hard money, your own money, a bank loan if you’re able to get it then you have to rehab it, you have to rent it out, but then you have to be able to refi and that’s really where Mike’s saying you know, get pre-qualified because if you go out and you aren’t prequalified and you get approved by a hard money lender, which is typically way easier to get approved by than a bank because they have a higher rate in a shorter-term and then you get it rehabbed and rented and if you can’t qualify for that refi, well then you’re stuck paying a super high interest rate on a short-term loan to a hard money lender that may be okay with you paying that rate for a long period of time, but typically they’re going to want to take that property back and sell it to liquidate their own risk, right? So, you want to get that pre-qualification done in the beginning. Now, if you get pre-qualified and you get denied, well, you can still proceed, you just have to take on a partner that can be qualified and then you would have to put in the leg work or provide some sort of value to that person to get them to partner with you. That’d be the easiest solution to get in the game and do this but again, you’re going to be giving up something by taking that partner on. The other option would be to figure out what you need to get qualified and work on those things. Isn’t that where you were gonna probably go Mike?

Mike: That’s exactly where I was headed. So it is, it’s basically a game, real estate. You’re always looking for good deals and you’re always looking for more money. As a wholesaler, as a rental buyer, you’re always doing those two things and the looking for more money means I’m looking for bank money at this point. I want someone who’s going to loan me money long term at a low rate. So if you can’t get qualified, yeah work on your credit, figure out what you can do to improve your credit because it is so important. This isn’t the stuff they teach you in school, I don’t know why they don’t. This is more important than most things you’re going to do, is keep your credit score up. We’ve got- so this goes over to Travis, Travis is one of our acquisitions guys. Great guy, he’s like man I really want to start doing BRRRR too and he was telling us-

David: Last week.

Mike: Yeah, he told us he read the book and is very interested in it and said well I just don’t have any assets. Doesn’t really matter man, if your credits’ okay, if you go do the BRRRR method, there is an asset that the bank gets to loan against. They like that, banks like having an asset to loan against, like that’s easier for them to do than to set up a line of credit. So, that’s what he was asking me about like should I go get a line of credit or something? No.

David: Yeah, unless you have stocks or bonds or real estate to pledge, you’re not going to get a line of credit too.

Mike: You don’t need a line of credit.

David: Or you may get like a credit card line of credit, you know, like we have some students that-

Mike: 50 hundred grand or so tops.

David: 150 grand, 200 grand, something like that typically. 0% credit cards through fund and grow.

Mike: Oh, that’s right.

David: We love them however, it’s temporary. That’s 18 months of 0% interest and then that rates going to go up to 15 or 20% or higher depending on how you do it. Now if you are responsible, hey that’s 18 months 0%, you’re going to pay a couple grand to get enrolled in that as well though and have somebody help you set that up, but typically yeah, you are absolutely right, you know, one of the best ways to acquire assets if you don’t have any already but going to the bank and starting the relationship was where we pointed Travis. That’s the first thing we both said is-

Mike: Well, to your point about the fund and grow, using that- to me, that’d be a great way to acquire, so that’d be a great way to buy it day 1.

David: And rehab yup.

Mike: And rehab but it probably is not a great idea to have them as your-

David: Oh no, your long-term mortgage holder, which really wouldn’t be a mortgage, it’d just be credit card debt to compensate- in exchange for it but yeah, you’re talking a rate-

Mike: Yeah, it could go up to 30%.

David: Ten times the rate of what bank would offer you, you know, 4-5% vs 40%.

Mike: Yeah, but again it’s a great way like you said so-

David: To purchase though, yeah.

Mike: Well, to purchase or to fund a rehab cuz if a hard money lender often times, they’re only going to lend a certain percentage of the deal, so maybe you can get them to purchase- to fund the purchase but not the rehab as well.

David: That’s a great point.

Mike: So, you couple those two things, you use a hard money lender to buy it, you check out our DPIpodcast.com toolkit and find fund and grow on there, our funding partner and they will lend you the money or they’ll help you qualify to get the money 0% interest to do your rehabs. So, that’d be another good way to get started on that. Dave said yes find a partner, that is probably our best bet for someone with poor credit to get started as soon as possible because you’ve got to re-.

David: Fixing credit may not be quick, you know.

Mike: It’s not, it’s not a quick thing.

David: I mean, you may be able to jump it up 15, 20 points relatively quick within- and I mean that like within two to three months, like that’s quick in credit world, right? You know, so -but getting a credit score to be fixed from you know 4- 500’s to get up closer to the you know, 650-700 range, that’s going to take some time and typically that’s going to be paying off debts or spreading, you know, your debt around, you want to keep your-

Mike: Let’s real quickly talk about some things you can do to keep your credit score high cuz this is stuff that I didn’t know when I started. So, I was I think 17 or 18 or so when I applied for my first credit card because I knew I wanted to build my credit history so I’ve always gotten loans on things, I’ve gotten loans on cars, again for myself because well one, I didn’t have the money and two, because I know I wanted to build my credit. So, I had revolving credit, those are what credit cards are called is a revolving account and I had those since I was 18. I got different ones, you know from time to time, I got one with this bank and then I changed banks and I got another one. What I didn’t realize Dave is that the length of time that the account is open also affects your credit history and your score, so I closed down some of my older ones, now this has been years ago, I’ve had the same accounts now for many years and well we don’t need to go into all the details but if you have an old credit card, the reason I’m getting at this guys is if you have a really really old account, don’t just go cancel all your old accounts to try to improve your credit score that’s not going to help. Keep your older accounts, cancel the Kohl’s card if you just opened a Kohl’s account because it’s silly to have that much, you know, on a whole bunch of different little accounts. So yeah, again a length of- length of time that accounts are open is very important as well as payment history. So again, make sure you know that. Any other little tips you have on credit score?

David: Yeah, keep the balance below 30% or 35%. I’ve heard different numbers, but you know, if you have a $10,000 credit card-

Mike: Credit limit.

David: Limit and you know, you- ideally, you know not everybody is able to do this of course, but this is just how they work if you’re able to keep the amount borrowed against that 10,000 below, I think it’s 30%, it’s going to help with your credit reporting and your scores.

Mike: So why is that? because if you have a 50 or 60% of used credit to available credit, your higher risk, right?

David: You’re higher risk, right.

Mike: So it’s just- yeah, it’s keeping that down to 30% or less means that your lower risk., therefore-

David: Yeah, try not to make- try not to miss a payment or be late on it.

Mike: Yeah, do not miss payments.

David: Yeah, I mean being late is one thing but don’t miss them altogether completely, you know, make them.

Mike: So, set up auto payment guys. Super easy way to make sure you make your payments. Set up auto payment on your cards.

David: That’s right and then a couple other things that I could think about would be-

Mike: One, don’t spend money if you can’t pay it back.

David: Yeah.

Mike: I know that sounds silly, but I mean if you have no way of doing it, try not to do it guys. You’re just digging a hole.

David: So, credit’s really usually only about half of the thing, the other half is debt to income. They want to know how much- so, you know when you go to apply to a- for a loan at a bank for a refi or a purchase or whatever it is, in order to- you know part of the underwriting process is a) how much or how good is that person’s credit? and that’s going to affect the rate ultimately as well if they have good credit or bad credit, not a whole lot but it definitely is affected by the rate and then you know secondly would be the debt to income which is just a simple ratio guys. It’s how much debt do you have? and how much income do you have? I think its debt over income or income over debt, not really sure how to calculate that but-

Mike: And this is something that we harp on too because a lot of guys like us, like myself who didn’t do it right, you start- you get into real estate, you start making big paychecks more than you made before, it’s really exciting and you want to quit that day job. We really really don’t like to see that, and this is something that goes back to the question that was asked of us about how to improve your credit or how to get into BRRRR right away is keep your day job. Keep your W-2 income until you’ve got one to two years of tax returns showing that you’re making money on your own as a self-employed individual.

David: As a part-time.

Mike: Doesn’t really matter. Yeah, so no matter where you’re at, you want to keep your current job because a history of the same W2 job makes you more bankable so keep that W2 job, it’s going to be easier to get a loan.

David: That’s right. At least for the first two years.

Mike: Several years.

David: Several years, right.

Mike: I mean again, until you’ve got- until your tax return show that you’re making money on your own, meaning you’re paying the government taxes on that earned income, until you do that-

David: Until you do that-

Mike: You’re not necessarily going to be able to get a bank to want to loan you money.

David: That’s a great point.

Mike: So again, it’s- yeah, it’s a catch 22. Show the government how much money you made and file it all and then you’re going to pay a lot of taxes or don’t show the government everything you made or take all the deductions you can get and pay very little in taxes, but then you’re not going to be able to get a loan.

David: So then you’re not going to be able to get loans, yeah. That is-

Mike: Yeah, it’s difficult.

David: That is one of the biggest challenges that we face, that Mike and I you know faces, you know, do we try to take every single deduction and depreciation and this and that and just try to reduce our taxes? and in theory, that sounds like a great idea but if you can reduce your taxes down to basically zero, the problem with that is you’re not making any income that’s taxable and that’s what the bank wants to see, they want to see taxable income.

Mike: No, banks can look past it. I mean, they can see if they look in your financials and they can see it but it’s just- yeah, no, they want to see W-2 income.

David: They want to see paid taxes on income. Yeah, that’s really what they want to see so that can be challenging sometimes. So, sometimes you have to say, all right well, let’s not take every single deduction and tax break that we can because we have to be paying some taxes so we can show that we have income so we can keep getting loans. So, that will definitely be a balancing act and that’s a little bit more 2.0, I think that’s a little bit more down the line but in the beginning if you want to get involved with BRRRR-

Mike: It’s not though Dave.

David: Go get pre-qualified.

Mike: It’s day 1 stuff because a lot of people try to hide income. They don’t want to pay taxes. Don’t do that.

David: Yeah, that’s- just be aware of it.

Mike: Even if you’re a self-employed lawnmower or I’m thinking of some of our contractors who don’t want to pay taxes and they don’t want the 1099.

David: Yeah, but they’re also not able to get loans.

Mike: You can’t get a loan, pay your taxes guys like it sucks. Pay your taxes, pay an accountant thousand bucks for the year to help you not pay as much, but show that you made the money.

David: Show that you made some money, right.

Mike: Yeah, it’s just crazy.

David: So, number one though, get out there and if you can’t get approved for yourself, then maybe take a partner on that can. That’s an option 1 or get a cosigner, that maybe another option other than a partner if you don’t want to share equity, get a cosigner. That may be a little bit more difficult, but it is an option, you know, I had cosigners on my first couple of loans that I had when I was in college and I did- worked at like pizza places or sandwich shop, so I had income but it wasn’t much at all, so I had to have co-signers. So, partner or co-signer would be option one to get you started right away, option two will be go try to get pre-qualified, talk to your banks, figure out what the issue is if you aren’t approved and don’t get upset if you aren’t approved. Mike and I have done this a hundred times and we still get denied whenever we reach out to certain banks because they may not have the appetite for these type of loans right now.

Mike: It’s complex underwriting.

David: It’s complex underwriting and it goes up and down, they may have an appetite, they may not. So, certain times a year they may want to work with us, certain times they won’t. It also depends on the economy so if a bank tells you no, find out why and try to work on those things but in the meantime go start talking to other banks. So, Mike and I work with 6, 7 probably- I would say probably 8, closer to 8 or 9 banks if you include-

Mike: We got relationships with probably 8 or so different lenders.

David: 8 or 9, yeah different lenders and we’re constantly bouncing between, you know, them because we want to get the best deal we can get at the lowest rate as well, but sometimes some of these lenders will say hey, we don’t have an appetite for this right now so it helps to have multiple lenders that you can work with, but also figure out what those requirements that each lender has are and if you don’t meet those, well then just start working on those and typically it’s going to be two things. It’s going to be debt to income or it’s going to be credit or both. It could be something else of course, but that’s typically the two things that are going to make or break you getting, you know getting involved in this in this game. So, that’s really what it comes down to you guys, if you have terrible credit and you have no plans of fixing it this may not work for you if you can’t get a partner.

Mike: Yeah, that’s so what? So what if it takes you 2 years to repair your credit?

David: Right.

Mike: Three years to repair your credit?

David: Such a good point.

Mike: And then you build your portfolio after that.

David: And then you can start buying assets later, yeah and that’s such a good point.

Mike: Like, come on 3 years in the scheme of your 80-year life. Like, yeah there’s no reason not to guys so get out there, figure out what is keeping you back. If it’s something your credit, figure out how to fix it and yeah get going.

David: Awesome, signing off guys.  

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