Since I’ve started this vlog, I’ve been going through the 14 most common mistakes new real estate investors make. We’ve gotten through the main 14, and now I’m covering the bonus section. To catch up on this series, visit my youtube channel.
Mistake #3: Not Setting Up Bank Lines of Credit.
If you want to become a serious investor and build higher levels of wealth, then it’s important that you understand how to set up bank lines of credit. To set these lines up, I always encourage people to go to local, community banks. If you go to the big, brand name banks, they won’t help you much unless you have a large amount of assets that are free and clear, meaning there’s not a lot of debt on those.
I told a story in one of my vlogs about the two young men who came to me for advice about building a huge, real estate empire. (One of them actually did!) I encouraged them to go visit local, community banks, outside of the metropolitan area where they lived. They lived in a large city with several million people. I said, “There’s a lot of small towns around and some of the real estate you’re going to buy is in those towns. Start meeting the presidents of those small banks.”
The point is that most of banks have anywhere from $500,000-$1,000,000 they have a right to approve. With that in your pocket, when you find a house, you’re able to close on it fast. You don’t have to go through all of the challenges of finding out your debt-to-income ratio or providing income verification or other qualifications.
Instead of doing all that in the moment, you work ahead of time with these local banks. Say you get a $500,000 line. You’re in an area where you can buy an average 3-bedroom, 2-bath home for $150,000. With that line of credit, you can just go write a check. You find a $175,000 house and are able to buy it for $135,000. It’s going to take $10,000 to rehab. You can close on that property with the bank line and then borrow another $10,000 from the bank line to rehab the home.
You’re able to move quickly though that real estate process. Let’s say you sell that property in 90 days, but in the meantime you find another property. Well you still have more money. You don’t have to go play the mortgage game that takes a long, drawn-out time to get your money approved.
If I say it one time, I say it a million times: Real estate is really about finance. It’s important that you establish those local lines of credit so that you can move quickly, find properties, rehab them and then sell, rent or, refinance them. If you refi it with a mortgage lender, then that bank line of credit gets paid off by the mortgage you got on that property.
Now, some people use what’s called a home equity line of credit (HELOC) on their primary home. The home equity line of credit works very similarly with the mortgage companies to what I described working with the local banks. So you can use a brand name bank and get a HELOC. It’s very flexible, the interest rates are low, and you’re able to purchase quickly and rehab quickly.
If you already have a primary property or several properties with equity in them, you can go the route of a HELOC—especially if you’re newer and building up to ten properties. The HELOC works very powerfully for those. In fact, one of our students uses only uses HELOC for her buying and selling. She’s doing a phenomenal job flipping homes in that $200,000-$250,000 category. She has a HELOC she uses, so she’s able to do maybe two properties at a time if she finds them.
Having lines of credit for real estate is a powerful instrument. We’re going to talk on that a whole lot more in depth in the real estate workshop that’s coming up at the end of April 2016. If you’re interested, you can email us at email@example.com.
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