Episode 9: As A Real Estate Investor, Why Is Credit Critical?
That word "credit" is everywhere. "Credit card". "On Owner Approved Credit". Well what the heck IS "credit" anyway? Did you know that there is a different type of credit between your personal credit and your business credit? True story. This podcast episode will help you understand why, as a real estate investor, having good personal credit makes you credible. What is a credit score, and why does it matter? And, most importantly, what happens if you have messed up your credit? Can you fix it? (Yes, you can). Join me in this episode to learn all about personal credit, and why you need it as a real estate investor!
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Full Episode Transcription
Welcome to My Life as a Landlord, where we untangle all things housing and educate the curious. If
you're looking for some entertainment with some honest, awkward conversations, you've come to the
right show. I'm your host, Dr. Jennifer Salisbury. This is my life as a landlord. Welcome to it. Hi. Hi.
This is Dr. Jen, your host. My life as a landlord. It is the podcast you're listening to. I have five content
buckets, tenancy issues, landlord issues, real Estate Development Lessons, real Estate Investment
lessons, and then other Salisbury adventures. My last name is Salisbury. And so then it's my family
adventures. Today's episode episode Nine as a Real Estate investor, why is credit critical? That is the
number one important thing, not only as a real estate investor, but as anyone that is a consumer, is your
credit rating. We'll talk more about that here in a minute. So just a reminder an investor invests money
for some kind of return, whether that's more money or feeling good or some kind of benefit. 1s That's
what a real estate investor, a real estate investor invests for some kind of return. But a developer, if you're
thinking of a real estate developer, seeks the highest and best use for a piece of real estate. So there is a
difference between a real estate investor and a real estate developer. So as a real estate investor, let's talk
about credit. Let's talk about why a credit it is so important. What is it? What is credit? Everybody talks
about credit. The word credit is in credit card. What is all this? What is it? And why should you care?
Really? So credit is a system that rates you on how well you pay your debts. Very simple. It's a number
that rates your ability to pay your debts on time, overtime. Let me say that one more time. Credit is a
number that rates your ability to pay your debts on time, overtime. I will tell you if you are listening.
In Canada, the Canadian credit system the numbers are different than in the US. 1s So depending on
where you are will depend on 1s what the numbers are. So I'm not going to go specifically into the
numbers but just know that the credit systems are different and they they it is the same rating. It isn't a
rating of good, excellent, poor okay? It is rates, the ability to pay. Now if you have no debt meaning no
credit cards, no mortgage, no loans you work on cash. Maybe you work at a bar and you get paid cash
every day, guess what? You won't have very much credit. You might not have any credit at all.
Especially if you have a pay as you go phone. You won't have any credit. And it's going to be very hard
to justify when you go to apply for a credit card or a loan or a mortgage because you have no history.
That's tough. And especially I see people who are young have a problem with no credit. But I have seen
people who are not young, who are later in life who have just had all cash forever. They've never paid for
anything. They've never taken out a loan. They've had a pay as you go phone that you get at either
Walmart or some of these other ones that you don't take a contract out, you don't take a loan out. It
doesn't report on your credit at all and as a result you have no credit. I've also seen new folks that are say
they're new immigrants, they're new citizens or new landed immigrants wherever they are, there's no
credit because they've not been in the country and that can be a problem as well. So you want to make
sure that if you are a young person or you're new to, let's say you want to buy a house, even if you're not
young, let's say you're 30, 40, 50, you need to establish some credit. Because if you can't prove that you
pay your debts on time, it's going to be really hard for somebody to give you a loan or a mortgage. It's
going to be difficult. Cell phone bills. This is the other thing I was saying. As a pay as you go phone
that you pay in advance will not report to your credit because it's paid for in advance. If you go and you
take out a two year contract with a cell phone provider, let's say, and you agree to buy the phone and you
agree to this, then it will report to your credit. And I've seen a lot of people get in to trouble because, 2s
let's say they miss a payment or they forget how to keep up with their payments because quite frankly,
most of the time, people with a new cell phone, they've never done it before. So 1s how do you actually
fix that? So we'll talk about some of that here in a minute. But this is all, of course, talking about your
personal credit. Your personal credit. There is something called business credit. So if you have a
company, and the company can prove to pay its debts on time, over time, the company itself will have a
business rating as well. That's different than personal credit. Most of the time, 98% of the time when you
say the word credit, you mean personal credit. But they are different. And I'll do a future podcast on
business credit because it's very interesting. When I learned there was a whole parallel credit system for
just for businesses, I was floored. But personal credit. So what goes into personal credit 1s the time that
an account is open? 1s The debt to income ratio. Because, of course, if you're going to have personal
credit, they're going to take notice of the income that you have and then the debt that's registered against
that income. Most loan providers, most banking institutions will take per net worth for sure. They'll want
to know, what do you have? What do you owe? On what personal credit also can depend on the amount
of credit that you have. Let's say you have a credit card limit of $10,000 and you pay it off every month.
It will report that you pay it off every single month that you're not keeping a balance. But let's say you
keep a balance. Let's say you have a revolving balance on a card or a loan. And ideally, you'll hear
different credit reporting agencies tell you something different, but usually you want to keep between 20
and 30% of the limit as a revolving balance. And why? Because it's just enough of a debt to prove that
you can pay. It kind of weird. Yeah, you're going to pay a little bit of interest, but you're proving that you
can pay your debts. So that's kind of different and then depends on the type of debt. Retail cards, a
mortgage, student loans. A retail card is like Victoria's Secret State Farm. There's a couple of different
ones that if it's a store based one, and usually the credit, the Apr, the percentage rate for holding those
cards is really high, like right around 30%. It's really high. That will impact your credit more than, say, a
long term debt that's registered like a student loan. That's different. Okay, so that's personal credit. Now,
there's other things that impact it. This is just a bit of a summary, so if you want to know more about that,
I highly encourage you to go into credit. We'll talk a little bit more about how you can do that. But along
with a personal credit, you get at both a report and a score. Now, the score is what we've talked about the
number. The number that rates your ability to pay your debts on time, over time. That's the score. 1s But
you want the story behind the score. That's almost as important as the score itself. So that's a little bit
about credit itself. But why does this matter as a real estate investor? Because remember, this podcast is
about real estate investment. As a real estate investor, you are investing in real estate for a return and
very likely you have other people or other institutions who are investing with you. And those other
people, those other investors are wanting to make sure that you can pay your debts, that you've proven
that you can pay your debts, which is called credibility. They want to make sure that you have credibility
as a consumer, as someone who can pay their debts. The credit reporting credit score is usually accepted
universally as someone being able to keep their word. Now, that's not always the truth, right? There's
always exceptions. So just let me put that out as a blanket statement that it's one indicator the credit
score, the credit report is one indicator of credibility. Now, I've seen inexperienced folks, some of them
are young, but again, I explained before about immigrants just coming to country and they don't have a
whole lot of credit. Folks that either are young or inexperienced, they fail with their credit because
they're not sure of what it is. They have no idea how payments impact their credit. And I keep going back
to that cell phone. I check credit on every single one of my tenants. I check them when I screen them.
And the number one thing I see as a credit problem is a cell phone is they get a cell phone, let's say it
breaks. They don't pay the bill because now they can't use the cell phone. They never settle that bill, and
they never settle the debt, which means the cell phone company then takes it to collections, says, hey,
you owe me $600, $800, whatever it may be. And then the collector hounds them, and it gets reported as
bad credit on their credit report credit score. And and they just think, that's it. And unfortunately,
remember, this is a number. The credit is a number that rates your ability to pay your debts on time. Over
time. It's a rolling report as you progress, as you go. It reports the last seven years. It can go longer. I've
seen it go a little bit longer. But things fall off after seven years. 1s So if you have a cell phone bill that
goes to collections and it's just there, it's not the end of the world. Remember, it will fall off and you can
dispute it. The other thing that can happen is you could have life events, divorce, maybe your house
burned down, a car accident, somebody had a change in health. Maybe you had a change in health and it
caused your debt to go up a lot. Let's say you had to do some medical treatment or do flights or get your
car repaired and it was unexpected or something where your debt went way up unexpectedly, that will
impact your personal credit. Now, when I am looking as a landlord and also as a real estate investor, I'm
always looking, okay, what's the score? What's the story behind the score? This is no different, is that if
you can explain what your credit is all about, what's going on with your credit and how you're managing
your credit, that is all part of credibility. 2s So, so far we've talked about what is credit? Why does it
matter as a real estate investor? And that's credibility. And then let's talk about the third thing. How do
you recover your credit? How do you recover it? Let's say you've made a mistake or you've had issues. 2s
You read your credit report. Read it, go through it, make sure it's right. I've read credit reports before my
credit report, and I go, Wait a minute. I closed that years ago. That shouldn't be open. So you need to
make sure you read it, and then you can educate yourself. If you want to dispute a charge, dispute a late
fee or late something. Dispute it. Write a letter to the credit bureau. Let's say this is a false claim. I don't
agree with this. Or let's say it is a correct claim. Let's say you really did not pay that cell phone bill that
you've been dreading. Work out a payment plan, call them up and say, okay, I owe you $600. I can only
pay you $50 a month or $30 a month, whatever it is, that will change how it impacts your credit, and they
will report back to the credit bureau that you are, in fact, paying it off, making good on your debt. But
have that awkward conversation, and you can recover your credit now in. In the US. You can buy your
credit reports. You can get credit scores. Some credit cards actually offer your credit scores, your FICA
credit score, depending on a credit card that you have, that you can get the score, but you can't get the
report necessarily, so it may not be helpful. Remember, the score is only part of it. The report is only part
of it, but you can buy them from Experian or Equifax or TransUnion In. Yes, you can go to Credit Karma
and it just depends on how you want to do it. If you're in the US. And you really want to get a free credit
report, just Google it. I'm sure a bunch of things will pop up. But be careful, because if you're going to
pull something for free, remember, nothing's for free. You might be able to get your credit score and or
your credit report, but you might also be signing up for an automatic renewal every seven days. You may
be buying something that you don't realize you're buying. So just take a good look at that. In Canada.
You can go to TransUnion CA. There's companies like Borrow well, there's others as well that you can
monitor your personal credit. Again, we're not talking about business credit in this podcast. We will in
future. But what you're looking for is ultimately you're looking for a way that you can either learn for the
very first time if you've never read your credit report or you've never checked your credit score, I highly
encourage that you do that. And especially if this is your first lesson in personal credit, make sure that
you check your credit for the very first time. You've never done it. That's my call to action for you. If this
is your first one, make sure you know what your credit score is and why. You can also read a book about
credit. There's lots and lots of books about credit, especially for your personal area, wherever you are. If
you're in Australia and you're learning about personal credit, I guarantee you there's a few books on
personal credit, how to have good personal credit, what's the strategy? Or if you've made a mistake and
you need to recover your personal credit, how do you do that? Just google it. I'm sure that there'll be
some books that will pop up and make sure you read it right. This is a call to action. I'm not saying it for
my health. I want to make sure that you are prepared as a real estate investor, that you have your
credibility, that you read it. If you don't know what your credit report is, if you've never been in there,
you want to make sure that you know that as a real estate investor, mike and I actually monitor our credit
on a monthly basis. We pay for the monitoring. It's about $20 a month for each of us. 1s I'm on Experian
and he's on equifax. Because we're in the US. We do most of our real estate investments in the US. And
so every month we get charged our $20. But keep in mind, the goal of having good credit as a real estate
investor is that you have credibility. Whenever we go into negotiate a property, whether it's refinancing a
property or we're buying a property, whatever it is, I will go in and I will automatically include our
current credit report and current credit score for each of us, along with our credibility package, even if
they don't ask for it. I will throw that in because I know inevitably they will ask for it, and I want them to
be prepared. Sometimes the bank institution will have to do what's called a hard pull, meaning they
actually have to go in and pull the credit report and pull the credit score, which we know that is coming.
But what I normally do is when we're negotiating and say, look, here is my view of the credit. 1s Don't
make that hard pull until you approve me. Because if they're going to turn us down, I don't want them to
pull my credit. Right? Okay. We've talked a lot about credit today. We've talked about what is it? Why
does it matter? How do you recover your credit? Your call to action. If this is your first lesson in personal
credit, make sure that you know what your credit score is and why. And as a real estate investor, it's all
about ability. That's why credit is so critical. Next up, our next episode is all about other Salisbury
adventures. And specifically, I'm going to talk about living on Maui. Yep, that's right. I'm going there.
You'll want to hear our next episode? We'll see you there. Thank you for joining us this week. To view
the complete show notes and all the links mentioned in today's episode, visit our website at www.
mylifeasalandlord.com. If you're looking for educational resources for getting into real estate, investing,
becoming a landlord, or even a better tenant, then I have a page on my website to get you started looking
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