How Your Credit Influences Your Wealth Building Potential
John Larson and the Real Estate Cowboys talk passive income real estate investing.
Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about the dreaded credit and how it can accelerate or stifle your wealth-building potential.
Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.
Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream.
Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys.
Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.
John Larson: Hello, and welcome back to another edition of the Real Estate Cowboys. This is your host, John Larson. We are back from a week hiatus. I had to make an impromptu visit down to Belize to check on our hemp farm that we have down there. We’re starting a new raise. Some of you may know, if you follow the Real Estate Cowboys and American Real Estate Investments, we’re starting a new private money raise that’s going to be paying 15% on your money for one year. That is currently underway, but I had to get down there, shoot a video, show our investors the opportunity, show them how much progress we’ve made on the farm thus far. We’re ready to start planting seeds in our greenhouses and then eventually moving them out to the field. We’ll probably be harvesting our first crop by December. That’s the plan.
The beautiful thing about Belize is we can get multiple harvests down there, whereas in America you can only do one harvest a year. In Belize, we can get three and a half harvests per year because of the climate, the fertile soil, the proximity to the equator, the fact that you know, the temperature and climate stays pretty similar, pretty even keel throughout the entire year. So, very, very excited about this opportunity. But I am back now, and we have another great episode lined up, where we are going to be discussing credit, your credit and how it influences your wealth-building potential.
So, you know, credit is very important. You want to make sure that you have good credit, especially with real estate, where the power of leverage is just so great in real estate investing, especially on the single-family rental side, single-family home side, because if you have good credit, you can leverage these properties and only put 20%, 25% down on these properties in order to purchase them. Through Fannie Mae, the lending, the terms are just so attractive that you want to put yourself in a good position, so you have to have good credit. An Investor with strong credit is going to definitely get further along on the investment game in terms of using the power of leverage, not coming out of pocket with so much capital to acquire these properties.
So, everyone talks about building wealth in real estate like it’s as simple as just finding the right property and then reaping the profits, but what few people talk about is how you’ll never get anywhere with real estate investing unless you’re creditworthy, unless you look good in the eyes of the banks. So, you know, deep pockets may not be enough when it comes to growing a real estate portfolio. Even some hard money lenders want to see that you know how to handle debt in a responsible way before they’ll lend you any type of money, even at a high rate and a large down payment. Hard money lenders, a lot of times, if they’re a non-recourse lender or recourse lenders, you know, are going to want to see a credit report. Right?
You know, if you’re thinking of getting into real estate investing, you need to start by making your credit as good as you possibly can. If you need some credit repair, you know, I’ve used an online service. Lexington Law has been great in helping get some minor things off my credit report. That’s boosted my score. I would recommend them for sure. I believe it’s only about $100 a month to hire that service, and they do a good job of kind of expunging some of these derogatory things, maybe late payments or whatever it may be that are bringing down your credit score. They’re good about taking them off and keeping them off, so you can, you know, boost that score.
You know, one question I get from some investors is how are loan applications processed today? What are mortgage lenders looking for and looking at? You know, lenders, they’re going to look at several things when determining if you’ll qualify for a loan. The important thing to understand about what a mortgage lender is going to look at is they don’t actually look at anything really. Most mortgage lenders use a certain software to make their lending decisions. The loan officer just punches in your data and waits for the answer. Pretty much that software is going to spit out a risk assessment and basically look at debt to income and things like that and basically spit out if you’re qualified or not. Okay? So, it’s not that straightforward, but that’s the general process that takes place. So, in other words, there is little you can do personally to ensure a positive outcome, except for making sure that the loan officer has all your information in a timely manner and getting your credit as healthy as possible before applying.
What are the things that mortgage lenders consider? There’s many things, several things that they consider for mortgage loans. The two basic criteria are your credit score and your credit history. Your credit history is going to impact your credit score, obviously, so those two are interlinked. Once your credit score meets the minimum requirements for a loan, the next thing will be an in-depth look at your credit history. Lenders strive to get an overall picture of how you handle your finances. Not everything is as serious as you might think, while other issues might be more detrimental than you may realize, like, for example, a bankruptcy. You’ve had a bankruptcy in your past. You may still qualify for a loan at some point, but that’s a pretty huge mark against your credit. Right? Lenders don’t really like to see bankruptcy, and you’re really going to have to go through quite a bit of credit repair, and you’re going to kind of have to start over from the beginning.
Like my uncle gave me a great story. He had to file for bankruptcy and couldn’t get a credit card, couldn’t get anything, but Sears, the department store, was able to get him qualified for, you know, I think it was like $300, a line of credit of $300. He said he went out, spent $300 at Sears, and immediately paid it off. He kept doing that until his credit started to rebound. A big way to build your credit is through the use of credit cards. Best way thing to do, you know … with my AmEx, especially American Express, you know, American Express typically wants you to pay the bill off each month. If you do that through American Express, American Express is a great way to build credit.
But I love that little story about Sears, because, yeah, if you went through a bankruptcy, I mean, it’s really difficult to get any sort of credit or loan at that point, but, you know, serious got him qualified for $300, and that ended up helping him rebuild his credit over the years. Now, he has almost perfect credit. So, you learn from, you know, a couple of mistakes that you made early on in life. Sears gave him a chance, and now he’s got, you know, an 800 credit score. So, you know, there’s a lot of different ways that you can build your credit up, but like I said, I recommend, you know, a credit repair service or getting a credit card and paying the balance off each month. I just feel like credit card companies and lenders just really like to see that paying the bill down each month and being responsible.
So, lenders typically want you to wait at least two years after the bankruptcy before they’ll even consider you for a mortgage loan, but if you have charge offs under $2,000, these will count only minimally against you, but if you have outstanding collection amounts, lenders advise that you pay those off before applying for any mortgage. That’s just going to really look bad for your debt to income ratio. So, you really are to want to pay down any large loans that you have before you go ahead and start going through the mortgage loan process. The collection account will still lower your credit score, but having an outstanding balance on a collection account also makes your credit history look worse. So,
keep that into consideration. Lenders are going to look very careful carefully at credit cards, like the ones that retail stores ask you to take out when you’re buying something, Nordstrom’s. Every time I go to Nordstrom’s, it’s just like every time they ask if you want to open a credit card. Right? But lenders want to see that you pay the charge cards on time every month, so you’re making on-time payments, but like I said, if you’re able to pay down the balance completely, that that just looks great, but that’s also, you know, managing the money, only spending as much as you know, you can pay off each month. Paying those credit cards off each month is just going to really make your credit history and your credit score look great.
Finally, lenders like to see a debt ratio of only about 35% or less. If it’s something over that, this indicates that you’re not financing your lifestyle. You know, if it’s over 35% it’s going to look a lot more detrimental to any type of lender, anything over 35%. So, if you keep it under 35%, this indicates that you’re not financing your lifestyle with credit. So, here are some tips to improve your score and credit history. If your credit is keeping you from being able to invest in real estate, you really need to change that. Okay? And so trying to get into real estate investing with bad credit will cripple your efforts. It may even result in you taking out a high-interest loan and getting into even more serious financial trouble.
Instead, what you want to do, you want to be patient and improve your credit score and credit history with some of these tips that I’m going to give you now before you apply for a mortgage. One of them is going to pay all your bills on time. I mean, set them up on auto-pay if possible. Late payments worsen your credit history each month. Creditors report the date a payment was due, when you paid, and how much was paid. If you pay late, even one time, this weakens your credit history. So, you know, make sure you’re paying all your bills on time every single month. Pay them early. You know, set it up where it’s autopay. Just in case, you know, something happens, I would just set it for, you know, three to five days before it’s actually due. You know, pay it early. That makes it even look even better.
Don’t use skip payment options. Okay? In certain cases, a lender, such as a charge card company, will send you an offer granting the opportunity to skip a payment. This may happen in certain economic situations like a recession or in areas where there has been a recent natural disaster. You don’t want to do this. The credit card company may not hit you with a fee, but the missed payment will still be reported as such on your credit report. So, if it’s possible for you to make your, payment do so. It’s not worth it in the long run, for sure.
You definitely want to dispute errors, and that’s why, you know, hiring a service like Lexington Law for even $100 a month I believe is beneficial, because you can sign into a portal. You can see where there’s errors, and you can tell them just from the online portal how you want to challenge it, and they’ll continue to challenge it until it’s removed. Then they’ll keep challenging it. So, you know, you can see things get removed and then it could get put back on, but they do a good job if you’re paying them the monthly fee, of keeping those things off. They just keep sending out letters to these debt collectors or credit card companies where they marked a late payment or whatever it may be. They just kind of harass him with letters, and every time a letter is sent the company has to go in and show proof or whatever it may be. Eventually, sometimes they just get sick of it and they just take it off. So, I do really like that service through Lexington L.
- You definitely want to review your credit report yourself before applying for a mortgage loan. So, I signed up for Credit Karma. I have that app on my phone. I get email updates and alerts from Experian, so any time my score goes up or goes down, I can go and see exactly why that was. If I have to dispute something through Lexington Law, I can notify them through the portal that this is an error, and they will handle it for me, which is really good. If you see anything at all, open a dispute case with the credit agency for sure. Like I said, Lexington Law can do that for you. The creditor has 30 days to prove the information is correct. Otherwise, they have to remove it. Right? So, if you’re successful, you may able to get some negative information removed, which will raise your score a few points for sure.
You want to get your rent and utility payments reported. Experian’s doing that now. They call it Boost. So, you can go through Experian and you can report your rent and utility payments. Apartment rent and utility payments aren’t ordinarily reported to the credit agencies, but you can have this recorded and added to your credit report. Obviously, you want to do this if you’ve paid your rent and utilities on time each month. Right? This is going to make your score look even better. There are third party sites that offer this service for a nominal fee. This positive payment history could substantially increase your credit score. So, like I said, Experian offers this service, so check that out.
You could also take out a prepaid charge card. If your credit is really bad, you can improve it by taking out a prepaid credit card. These are cards with a Visa or MasterCard logo on them and you use them just like a regular charge card. The difference is you deposit cash into the account first. For example, you would deposit $500, and then you’ll have a $500 line of credit on the card, minus any setup fees. So, your monthly payments will be reported each month to the credit bureaus. So, after a certain period of time and on-time payments, depending on the card, your deposit will be returned to you, and the card will function just like a regular charge card. That’s another really good option there. Some of the prepaid accounts can be opened with as little as $300, and it’s a really good option for anyone with really bad credit. Definitely take advantage of this. Over time you’ll start to see your credit score creep up when you’re making the on-time payments.
You know, in some cases it can take many months for your credit score and history to improve, so it pays to start improving your credit as soon as you can, definitely. Depending on how low your score is to start, it might be six months or longer before you’re ready to apply for any mortgage. Patience is definitely key, because the tips offered here will work to improve your credit, but it may take some time. Don’t let bad credit stand in your way of creating long-term wealth in real estate investing. There’s options out there for you to repair that, but you definitely want to take the necessary steps to repair your credit before starting to really jump headfirst into real estate investing.
It’s just you want to make sure you’re in a strong position credit-wise, because like I said, the financing that is available to you right at your fingertips and the way that banks are approving loans nowadays, it’s relatively easy to get a loan, not like it was back, you know, before the recession, which got us in the recession. But, you know, if you have a good credit score and you can show solid credit history, it’s not very difficult to get a loan right now, and the terms are great, especially through Fannie Mae. I’ve just heard that you know, the interest rate went down another quarter-point just recently, so interest rates are starting to come back down, whereas we saw a spike in them, you know, early last year. They’re starting to come down again, so it’s still a good time to buy a home, although I do believe prices are, you know, kind of back at an all-time high, the leverage that’s available to you is very powerful, and you’re definitely hedging against inflation, locking in this 30 year debt through Fannie Mae.
You’re seeing some areas, like in Texas they announced that they’re going to raise the minimum wage, but all that’s going to cause is prices on things to go up. That’s just inflation doing its thing. So, locking in that fixed debt for 30 years at call it four and a quarter, four and a half, whatever it may be, that’s going to be locked in for 30 years. So, as interest rates start to creep up, eventually you’re locked in, you’re hedging your bets against inflation, so that’s another way that real estate pays you in single-family home purchases. That’s how they pay you. It’s not just through the cash flow of your property by renting it out. You know, we discussed six ways that real estate pays you a lot of times on the Real Estate Cowboys because I think it’s so important for an investor to know the six different ways that real estate pays you and not focus solely on the cash flow.
But if you’re looking for a strong cash flow option, although you might not find it in rentals today, especially in rentals that are in good, healthy neighborhoods, you know. You know that I always recommend to avoid those low C and D class properties in those rougher neighborhoods, because I just believe that those properties just come with far too much risk and you never see the returns that you expect to see on the spreadsheet, because you’re dealing with so much vacancy, and possible theft, and vandalism, and just bad tenants that don’t pay. You have to go through eviction. They just beat up on the house. Those are the type of properties I tend to avoid.
If you’re looking for a strong cash flow play, how does 15% fixed annual on your money sound? That’s the opportunity that we have right now with our farm down in Belize, our 1,800-acre farm where we’re about to start planting our first 200 acres, basically a test run. We’re going to get it up to 1,000 acres eventually, but for now we only have enough capital to build a certain amount of greenhouses. You know, it’s going to take more greenhouses to plant up to that 1,000 acres. But we believe that 200 acres is a great test run for this farm. We have enough greenhouses built right now for that farm. We just need some capital for some more lights. The lighting is pretty expensive. We need some more operational capital to keep the workers paid and keep the farm, you know, moving forward. We need to build a fence, and we need to do some things like that.
We also want to hire some security, because once we start planting those seeds and things of that nature, we really got to beef up security around the farm. There’s only one access point in the farm, and it’s surrounded by a lot of trees and vegetation and also a creek that pretty much goes around the front of the farm, so it’s not easy to access except for this one main road. But we are ready to go. We just need one little capital injection to move forward, and we are going to be ready to harvest our first crop, as I said, in December of this year. Then every basically three and a half months after that we’re going to be harvesting again, which is great. It’s pretty much the gift that keeps on giving.
A lot of other groups have started to get down into areas near the equator. I’ve heard about Columbia and Puerto Rico and some of these other areas, but you need to understand that we are the first approved hemp farm in Belize. So, Belize I believe is just a lot better opportunity than some of these other areas that are near the equator, in Central America specifically, just due the fact that the dollar’s tied in two to one. It’s an English speaking country. It’s got a lot of land, and affordable land, and very solid, farmable land, very rich soil that’s perfect for growing hemp. I believe it’s a great, great opportunity that we have down there in Belize.
If you’d like to find out more information about this current raise, I do believe this raise will be closed by mid-October to end October, the way that we’re bringing in funds right now, but if you’re interested in taking advantage of this or learning more about this opportunity to earn 15% fixed on your money, go to RealEstateCowboysDFW.com or go to AREIUSA.com. Put in your information. A member of our team will reach out. We’ll present you with the marketing package. This is for accredited investors only, so if you are accredited, we can get a PPM. You can review the PPM. The marketing package is available for everyone to see. If you’re accredited, we can get you the PPM, get that in your hands. You can review the opportunity, and if it looks like something you’d like to move forward with, it’s a pretty quick and easy process to get you involved.
The money’s going to be locked in for one year on this deal. I believe we can it back further or sooner based on the revenue that we plan to generate through selling the biomass, and also we plan on getting an extractor that will extract oil out of the plant and put it in a trade free zone that we have access to, buildings that are on a trade free zone, which is another excellent opportunity that we have, where we can do our processing, and then anything that we export out of that, import or export, but we would be exporting, out of that trade free zone is tax free. So, huge, huge opportunity there as well. So, yes. If you’re interested in learning more about this opportunity to earn 15% annual on your funds, just go to RealEstateCowboysDFW.com or AREIUSA.com. A member of our team will reach out and give you instructions on how to move forward.
I’m excited about this opportunity. 15% is the most we ever offered. Rally the reason why we did that is because, you know, we believe that there’s a certain level of risk. I don’t think it’s too risky. We’ve been doing things down in Belize for years. So have the Real Estate Guys. So has Keith Weinhold from Get Rich Education. We’ve done investor tours down in Belize. Keith invests in Belize. I actually have a great episode coming out on Get Rich Education talking about the opportunities in CBD and talking about our Belize opportunity even further. It was good to talk to Keith about that because he’s very familiar with Belize as well and the opportunities that are available down there.
So, if you listen to my podcast, I recommend Get Rich Education as well. Keith Weinhold, great host. He has some great guests on the show, provides a lot of insightful information on investing and things of that nature. So, if you haven’t checked out Get Rich Education, I would check it out. Same thing with the Real Estate Guys Podcast. I’ve already been on their podcasts. I think it came out last month, a month and a half ago, somewhere around there. I talk about the opportunities lending on extraction equipment in the CBD space right now. There’s a lot of money to be made in this space. A lot of people are likening this to the next gold rush. I believe that that is true.
So, there’s tons of ways to earn money on CBD right now, you know, buying farmland, lending on farmland, lending to a farmer. Banks are still a little weary, even though the Farm Bill was passed last December, making hemp legal, taking it off the banned substance list, making it legal to grow hemp all over the US. Still, banks are still trying to wrap their minds around it, right? There’s opportunities for private lenders to come in and lend on equipment, lend on land like I said, and reap the rewards from that, and in a form of double-digit returns. Right? When you’re loaning hard money, you can usually see those double digits returns on your money and, you know, it’s very passive, because you’re just taking the role of the bank, and you’re holding first lien position on that equipment or that that land that you’re lending on, which collateralizes your loan and protects you. Right? Because we all know real estate never goes to zero.
The machinery, which I talk about this a lot on the Get Rich Education episode as well, the machinery just spins off such a high amount of cash flow. Usually for this extraction and the type of extraction that equipment that we purchased that does inline extraction, what it does it takes the fats and lipids out of the oil as it extracts, so it’s very, very efficient stuff. We’re going to be charging anywhere in the neighborhood of let’s just call it $20 an input pound of hemp to do this extraction service for farms and so on and so forth. So, the equipment itself that you’d hold first lien to, it spins off such a high and predictable cash flow that I believe it really mitigates your risk by investing on that type of equipment, lending on that type of equipment, and holding lean to it in the form of a UCC-1.
So, that’s all that we have for today, for this week’s episode. I hope you found this information insightful. I hope, you know, if there’s some of you that are listening that are ready to get started in real estate investing or any type of investing and feel like your credit may be holding you back, I hope I gave you some helpful hints and tips on how to start boosting your credit score, so you can attract better finance and start getting in the game. So, that’s all we have for today. This is your host, John Larson, signing off. I’ll see you again next week for another great episode of the Real Estate Cowboys, and always remember, what’s your return on life. Have a great week, everybody. See you next week.
Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.