Credit balance transfers with 0% introductory interest rates are a great way to tackle one of the toughest obstacles to real estate investing–raising capital. As Mike and I begin the process of rehabbing and flipping a HUD foreclosure we just bought, the need for short term capital is critical. But whether you are a real estate investor or not, balance transfer credit cards offer a great way to get free cash.

0% balance transfers are a great way to transfer high interest rate debt or to simply put the money in a high yield savings account to earn some extra cash. In our case, we can use credit balance transfers to help pay for rehab costs, and then pay off the debt once we sell the house.

So with all that in mind, what follows are a list of some of the best balance transfer cards available. I’ve included how long any transferred balance will remain at 0%, although you should read the terms and conditions carefully as offers can change without notice.. Clicking on the link for each card will take you to the card issuer’s website where you can get more information about each balance transfer card and apply for the card online if you’d like.

Chase 0% Credit Balance Transfers

» Chase Business Rebate Visa 12 months
» Chase Platinum Visa 12 months
» Chase PerfectCard MasterCard 6 months
» Chase Free Cash Rewards Visa 12 months
» Chase Platinum Business Card 12 months
» Chase Platinum MasterCard 12 months
» Chase Business Cash Rewards Card 12 months + Up to 5% cash back

Advanta Balance Transfer Offers

» Advanta Platinum BusinessCard with Rewards 15 months 0% balance transfer offer
» Advanta Platinum BusinessCard 12 months
» Advanta Kiva BusinessCard 15 months + rebates on charitable contributions

Discover 0% Balance Transfer Offers

» Discover Business Card 0% 12 months on purchase + $100 Cash Back Offer + up to 5% Cashback bonus
» Discover Business Miles Card 12 months
» Discover Miles Card 6 months
» Discover Open Road 12 months
» Discover More (Clear) 12 months
» Discover More (American Flag) 12 months
» Discover More (Wildlife Collection) 12 months
» Discover More (Sea Life Collection) 12 months
» Discover Monogram Card 12 months

As you review these offers, remember that the longest 0% balance transfer offer is not always the best for your particular needs. These cards often come with a variety of benefits, including cash and other rebates and travel rewards. In addition, with balance transfers, you may get a higher credit limit for shorter 0% APR offers.

A good credit score can save a real estate investor thousands of dollars in interest payments over the course of a mortgage loan. And a poor credit score can block financing at the outset. So how does one with a low credit score get it up, so to speak. Well, there are what I’d call legitimate ways to improve your credit score. And then there’s what we are going to talk about today–piggyback credit histories to improve your credit score. I should say that I’m not recommending this approach; I’m simply reporting on what’s going on in the world of credit scores. (But to be safe, don’t mention this article to Mike because he’s a tad legalistic if you know what I mean.)

Here’s how it works.

Renting Credit Histories

Various online companies pay holders of high limit credit cards to allow the company to add authorized users to the card. These authorized users don’t have access to the credit card itself and can never actually charge anything to the account. Individuals with low credit scores then pay these online companies a fee (often $1,000 or more) to be added to the card. The companies claim that within 90 days, and often within weeks, the individual’s credit score will increase significantly.

In one widely reported case, Alipio Estruch, a 37-year-old real-estate agent, paid $1,800 for three credit card slots that helped boost his score from 550 to 715 in about a month, allowing him to secure a mortgage at a favorable rate.

Enter FICO 08.

FICO 08

The credit reporting agencies and mortgage companies didn’t much care for the practice of renting credit histories, as you might imagine. As a result, last summer Fair Isaac who established the FICO credit score introduced FICO 08. FICO 08 excludes from an individual’s credit history any accounts on which the individual was an authorized user. The problem is that in many cases, individuals are authorized users of credit in perfectly appropriate circumstances. For example, when a parent adds their college aged child as an authorized user of a credit card, it will improve the child’s credit score. Under FICO 08, even these legitimate authorized users would be penalized.

So far, the three major credit reporting agencies have yet to adopt FICO 08. Interestingly, their own credit score formula, called Vantage, accomplishes the same thing as FICO 08. To add to the fun, the sellers of credit histories are claiming that FICO 08 violates the Equal Credit Opportunity Act, to which I can only say–Is this a great country, or what?

At this time, the mortgage industry has yet to embrace either. For now, they’re still using FICO (perhaps we can call it “FICO classic”).

Reader Question: Have you (or would you) piggyback credit histories to improve your credit?

Image By: Sister72

Maintaining a solid credit score is critical for real instate investors. In a recent article, we looked at theimpact of your credit score on mortgage interest rates. Today, we are going to describe 5 tips to help you improve your credit score.

1. Order your credit report and check for errors: Your credit score is derived from your credit report. Errors on your credit report can have a major impact on your credit score. You are entitled to receive a free credit report annually from the three major credit reporting agencies, which you can order from Annualcreditreport.com. You’ll want to review carefully each credit account and inquiry to make sure the information is accurate. The credit reports come with forms to dispute any errors you may find.
2. Pay your bills on time: This is an obvious point, but late payments can be a credit score killer. There are a couple things to keep in mind. First, credit card companies generally report payments that are 30 days late or more. This doesn’t mean that being one or two days late with the payment is a good idea. But when I’ve been a couple days late because the bill got lost under the paper on my desk, I’ve called the credit card company, paid the bill, and the late payment has never showed up on my credit. Second, when it comes to late payments, the credit score is influenced by the recency, frequency and severity of the late payments. In other words, not all late payments are treated alike. Here is what Fair Isaac (of FICO score fame) says about the impact of late payments on a credit score:
   

   Late payments are not an automatic “scorekiller.” An overall good credit picture can outweigh one or two instances of, say, late credit card payments. But having no late payments in your credit report doesn’t mean you will get a “perfect score.” Some 60%–65% of credit reports show no late payments at all. Your payment history is just one piece of information used in calculating your FICO® score.

3. Pay down your debt: I know the point here is to increase your credit score so you can borrow more to invest in real estate. But the reality is that paying down your existing debt can improve your credit score. One important factor in your credit score is the amount of available credit you have. $10,000 in debt with a credit limit of $10,000 (i.e., being maxed out) will present a greater credit risk all things being equal than $10,000 in debt with a $100,000 credit limit. And this brings us to tip #4.
4. Don’t close credit cards or other revolving credit accounts: This may seem counterintuitive, but closing credit card and other revolving accounts will not improve your credit score, and it may hurt it. As mentioned in tip #3, one factor that goes into your credit score is the amount of available credit you have. By closing revolving accounts, you reduce the amount of this available credit. And because the age of your accounts is also a factor, closing older revolving accounts can further deteriorate your score. Here is what Fair Isaac has to say on this point:
   

   In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not raise your FICO® score.

5. Apply for credit judiciously: To build up your credit history and score, you need to apply for credit. But there comes a point when applying for more credit will actually lower your credit score, at least for a time. Opening several credit accounts in a short period of time, for example, represents greater credit risk. In addition, inquiries to your credit report as a result of applying for new credit can lower your score. As Fair Isaac explains, for most people one additional inquiry may reduce your score by only 5 points:
   

   For most people, one additional credit inquiry will take less than five points off their FICO® score. However, inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.

If you’d like to learn more about improving credit scores, there are two resources I recommend. The first is a brochure from Fair Isaac called Understanding Your FICO® Score (pdf). The second is Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future (2nd Edition) (Liz Pulliam Weston). Both resources are excellent guides to understanding credit reports and credit scores.

Capital is the lifeblood of a real estate investor. And the cost of that capital can mean the difference between positive and negative cash flow. Mortgage lenders will set that cost based on your credit score. In this article, we’ll look at the most widely used credit score and its impact on mortgage interest rates.

Your FICO Score by Comparison

The most widely used and recognized credit score is the FICO score. Developed by the Fair Isaac Corp. in California, the FICO score ranges from a low of 300 to a high of 850. More than half of all FICO credit scores fall above 700, as this table shows:

Factors Impacting Credit Score

The FICO credit score is calculated using several categories of data from your credit history. Payment history is the single most significant factor, accounting for 35% of your credit score. New credit and types of credit used have the least impact, each accounting for 10% of the FICO score. Here are all of the factors and the percentage impact they have on a credit score, as reported by Fair Isaac:

Impact of Credit Score on Interest Rates

Your credit score can have a major impact on the interest rate you’re charged. The Fair Isaac website provides a tool for determining mortgage interest rates based on FICO score on a national or state average. As shown below, a borrower falling into the lowest credit score range can end up paying twice as much or more as one who has a high credit score.

In subsequent articles we’ll look at factors that lower your score and what you can do to improve it.

One of the toughest hurdles for an investor to grow his real estate investments is raising capital. A self-directed IRA may be the answer. The term “self-directed IRA” actually refers to the administration of the IRA rather than the type of retirement account. A traditional IRA, Roth IRA, or SEP-IRA can be self-directed. The principle difference is, with a self-directed IRA, the account owner is in charge of the investment of the IRA funds beyond the limited choices offered by traditional custodians, such as banks and brokers. Those investment choices, with the right account setup, include real estate.

There are, however, some significant practical limitations to using a self-directed IRA to invest in real estate, so care should be taken before embarking on this approach. Here are the basics, along with some potential pitfalls.

Setting up a self-directed IRA

A typical IRA at a brokerage house or bank typically does not allow the flexibility of investing in real estate or other non-traditional assets for one reason. Their own institutional rules do not allow it. These accounts limit you to stock and bond mutual funds, certificates of deposit and similar investments. Now, some may still hear from bankers or brokers that using an IRA to invest in real estate is not permitted or “illegal”. We’ll give them the benefit of the doubt and say that they’re misinformed. Whatever the reason might be, they’re wrong.

So, to use an IRA to invest in real estate, you have to open an IRA with a company that is setup to handle real estate investments. There are several national companies that provide these “custodian” services for self-directed IRAs, such as The Entrust Group. We’re not going to offer an endorsement of any particular company, and there are many out there. I would suggest finding one that has been around for a good while and consulting with your legal or tax advisor and other real estate investors for recommendations.

Typically, administrative fees will be higher than the typical bank/broker custodians, but the whole purpose here is to use the IRA funds in higher return investments that, invested properly, will more than offset the cost differences. However, even among the self-directed custodian companies, the fees will vary significantly, so be prepared to shop around for the best deal.

How to fund a real estate investment with a self-directed IRA

The types of permissible real estate investments in a self-directed IRA are virtually unlimited. Commercial property, single-family homes, apartment buildings, and even the purchase of mortgages are all allowed. If your IRA buys a property for cash, the transaction presents little difficulty.

But there are some restrictions. We all know that an IRA owner can’t withdraw funds willy-nilly to pay for personal expenses. So, Mike couldn’t use his IRA funds to, say, pay for writing lessons. The reason is that, at their essence, tax regulation of IRAs, self-directed or otherwise, have a common theme–to treat (and to insure the investor treats) the IRA as separate from the owner. That concept carries through in the restrictions applicable to IRA purchases of real estate. So, the purchase transaction must be between your IRA (as distinguished from you) and an unrelated seller. That’s where the custodian comes in. The custodian, acting on behalf of the IRA and at your direction, will execute the purchase contract, as well as deed and other closing documents, on behalf of the IRA. So, other than that, you’re pretty much good to go.

Most of the potential pitfalls arise in structuring financing for real estate purchases where part of the purchase price is borrowed. Again following the concept of separating the you from the IRA, the mortgage loan to finance the purchase must be a “non-recourse loan,” meaning you can’t be personally obligated to repay the loan. So, mortgage funding will be more challenging. Commercial lenders do make non-recourse mortgage loans. But since they will have to look solely to the property’s income and value for repayment, the down payment requirements will likely be higher than an ordinary mortgage loan. You might also consider trying to find private lender funding or pooling your IRA’s funds with self-directed IRA’s owned by others in partnership, which, other than the prohibited transactions (relatives and such) is permitted under the regulations.

There are at least two other things to keep in mind when considering borrowing a portion of the purchase price:

• You can’t pay the mortgage payment or expenses: Just as you cannot guarantee repayment, you cannot step in and pay the mortgage payment for the IRA or, for that matter, any other expense. Consequently, the IRA must have sufficient cash flow or assets to pay the mortgage and expenses. And no floating personal loans to the IRA to get it to payday either. Apart from ordinary contributions to the IRA, it’s on its own.
• Unrelated business tax income (UBTI): The details of this tax are a little outside the scope of the article, but suffice it to say that Congress gets a bit out of sorts when a bunch of money’s lying around un-taxed. Suffice it to say that an income tax may apply to income generated from real estate investments in an IRA on the the portion of the investment funded through debt. With available deductions, this may or may not be a reason to stick with a cash buy, but on this front, I’d suggest you consult with your tax adviser.

Prohibited transactions

As I’ve alluded to, tax law restricts certain transactions with a self-directed IRA. Prohibited transactions include those between the IRA and a disqualified person. In rough cut, “disqualified person” includes the custodian of the account, relatives, and companies where the disqualified person has a substantial interest. In more IRS-like lingo, here is a more detailed laundry list of examples of prohibited transactions:

• a transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person;
• the sale, exchange, or lease of property between a plan and a disqualified person;
• lending money or extending credit between a plan and a disqualified person; and
• furnishing goods, services, or facilities between a plan and a disqualified person.

A disqualified person includes, among others, the following:

1. a fiduciary of the plan;
2. a person providing services to the plan;
3. an employer, any of whose employees are covered by the plan;
4. an employee organization, any of whose members are covered by
   the plan;
5. any direct or indirect owner of 50% or more of any of the following:

• the combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4);
• the capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4); or
• the beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4);

6. a member of the family of any individual described in (1), (2), (3), or (4) (i.e., the individual’s spouse, ancestor, lineal descendant, or any
   spouse of a lineal descendant);
7. a corporation, partnership, trust, or estate of which (or in which) any direct or indirect owner described in (1) through (5) holds 50% or
   more of any of the following:

• the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation;
• the capital interest or profits interest of a partnership; or
• the beneficial interest of a trust or estate;

8. an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder,
   or highly compensated employee (earning 10% or more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7);
9. a 10% or more (in capital or profits) partner or joint venture of a person described in (3), (4), (5), or (7); or
10. any disqualified person, as described in (1) through (9) above, who is a disqualified person with respect to any plan to which a multiemployer plan trust is permitted to make payments under section 4223 of ERISA.

For most, what that list of disqualified persons means is that you can’t buy a rental property in Florida through a self-directed IRA and rent it to your parents. You also can’t buy a rental property near your child’s university and rent it to them.

Using the rental property for personal use may disqualify the entire self-directed IRA

Using a rental property for personal use may disqualify the entire self-directed IRA. So, assume you use $100,000 from a $1 million self-directed IRA to buy a condo at the beach. Even if you use the condo just two weeks a year, the entire $1 million IRA could be disqualified. Here’s how the IRS explains it:

However, in this case, with an individual retirement account, instead of imposing an excise tax on the parties to the transaction, the Code provides that the account is no longer an individual retirement account, and it is treated as if the assets were distributed on the first day of the taxable year in which the prohibited transaction occurred. (Code §408(e)(2))

The result would be a hefty tax bill and penalties. And that’s not good for anybody. So, as I noted at the start, a self-directed IRA can be a source of capital for investing in rental property. But the rules are complex, so you should seek the advice of a tax and self-directed IRA specialist before launching full bore. But here’s the thing. Like any investment strategy, there’s a certain learning curve. A good tax adviser can help you through the learning curve to help you see what’s possible in putting some of those real estate returns to work growing a retirement plan.

In the meantime, if you’d like to read more about using a self-directed IRA to invest in rental property, check out these books:

• Retire Rich With Your Self-Directed IRA: What Your Broker & Banker Don’t Want You to Know About Managing Your Own Retirement Investments
• All About Self-Directed IRA Investing

When Rob and I started our joint venture or “adventure,” as the tag line suggests, I had more experience in dealing in real estate. If Rob had posed this question, my answer would have been easy: “How much you got?” I’ll try to be a bit less glib with your money. But the fact is, it’s a little more difficult to answer the question in the abstract and it depends on several factors particular to the investor. As a result, I want to look at three approaches to the question–the guaranteed way, the conventional way, and, for lack of a better term, the TwoWiseAcres way.

The Guaranteed Way

If you’re looking to buy real estate for rental income, the fact is, you’re virtually guaranteed to make money if you pay cash. At the very least, it’s a low risk approach. Even if you make mistakes, such as over valuing the property or if property values or rents decline or if you entered a partnership with Rob, the fact is you’ll be able to rent the property, cover your expenses, and make an income.

The obvious problem, however, is that you just might not have the cash lying around. But as importantly, even if you do, paying cash for a rental property is probably not even advisable. While it’s a guaranteed way to make money, it’s also a likely way to make low returns because it foregoes any increased returns through leverage.

The Conventional Way

An alternative approach is to finance the majority of an investment purchase with a conventional mortgage. Conventional mortgage lenders generally require a minimum 20% down payment (without private mortgage insurance) for investors, as well as owner-occupants. A conventional, secondary market mortgage will have a lower interest rate than a loan from a portfolio lender. So, investors looking to obtain the least cost way to finance an investment property will have to come up with the 20% cash down payment. The 20% down payment requirement is a percentage of purchase price, not value. In other words, despite lenders’ use of the misnomer “loan to value ratio”, the requirement is really loan to purchase price. Investors going this route also have to pay out-of-pocket for the costs of improvements.

Obtaining conventional financing for a real estate investment purchase provides some cost savings, and it also lowers risk. While this approach takes advantage of leverage to increase returns, for the individual investor, it still has substantial limitations on growth. Consider an investment property with a price of $100,000, minimal rehab costs of $7000, with closing costs and prepaid expenses of 4%. An investor financing the purchase with a 20% down, conventional loan will have to come up with about $31,000. While that may be do-able, a second property will not be, at least not for some time.

The TwoWiseAcres Way

Rob and I went with a more aggressive approach. We purchased our first four properties with about $20,000 out of pocket. Our goal was quite simply to acquire the most property in the least amount of time given the amount of cash that we could devote to real estate investments.

The approach is not new and our method is not complicated or exotic. In obtaining the loans, we worked with a portfolio lender that was willing to fund a purchase and rehab based on the improved value of the property. In other words, we would enter into a contract to purchase a distressed property, such as a HUD foreclosure, provide the lender with a detailed improvement plan and, of course, our estimation of the improved value. The lender would then obtain an appraisal of the property, based on the work being completed–i.e. the improved value–and approve the loan based on an 80% loan to value ratio. The lender would hold a portion of the loan to cover our estimate of improvements in escrow until the improvements were complete and the property was re-inspected.

Revisiting our example, this approach means that we could borrow the full purchase price and improvement costs of $107,000 if the property had a value, once improved, of $133,750. By and large, we made sure they did. With our purchases, we might fund closing costs and prepaid expenses with cash or even a portion of the improvements or holding costs. With each purchase, the total cash was somewhere between $0 and $7,000. For three of four of our properties, we later refinanced the properties with conventional, secondary market loans. After a year (occasionally less), we could obtain a conventional loan at 80% loan to value–improved value this time, not purchase price.

The advantage to our higher leverage approach is exactly what we set out to do–grow quickly. However, there are downsides to the approach as well. Higher leverage means higher risk–risks such as unexpected expenses or underestimating rents more easily putting a rental property in the negative cash flow territory. Also, the interest rate charged by a portfolio lender is likely to be higher than a conventional, secondary market loan. Doing a two-stage financing, like we did, also means higher costs due to the costs of refinancing.

At its core, the question of how much you need to begin is really a question of return and risk–both your perception of risk and your tolerance. In our case, we felt comfortable with using high leverage because we had experience that gave us confidence that risk resulting from error in projecting rents or assessing improved value was low. However, we also had other resources that we could draw on–whether credit or income from the day jobs–that provided options if some of these risks came about.

For new real estate investors, a more conservative approach is probably warranted. While I don’t think it is necessary, even for a new investor, to begin the conventional way (funding a 20% down payment and rehab costs), a slow start is advisable. Consider using more available cash to fund the first property, thereby improving cash flow. Make sure you spend the time to truly learn the market and the investment. Look for the best deal, and be willing to allow a decent deal pass you by. There’s always another. Finally, have reserves–cash and credit. Real estate investors can make mistakes, but having no backup source of funds is the way to make a manageable mistake an unmanageable one.

Recently, we’ve seen endless references to tightening lending standards in the wake of the mortgage crisis. This past week I ran smack dab into one. I’ve been in the process of refinancing a short-term loan on an investment property that I purchased about a year ago. (One I bought without Rob. Shhhh.). I financed the purchase with a short-term loan, which allowed me to borrow 80% of the improved value of the property. The loan minimized the required cash down payment, but I knew I’d have to refinance the loan within 12 months.

As the 12-month mark neared, I began working with a mortgage broker to refinance the short-term loan with a secondary market loan. I finished getting the appraisal for the property, and that afternoon, I received the “Houston, we have a problem” call from my broker.

The New Rule

Apparently, lenders have instituted a new rule. They will not refinance a property if it has been listed for sale within the prior 12 months. My property had been. Sometimes, I’ll buy an investment property with the intention of holding it as a rental, but I’ll list it for sale with my real estate agent at the same time. With this particular property, I was indifferent between renting it or selling it. So I offered it both ways. Because the property rented quickly after I completed the rehab, I withdrew it from the market after the start of the lease. Now, it appears that my decision to list the property will prevent refinancing with a secondary market loan, at least for now.

Implications for Investors and Homeowners

This new roadblock to refinancing has significant implications for investors. For investors that still have the ability to obtain secondary market financing (generally, those with 10 or fewer existing mortgages), this new restriction eliminates the flexibility of doing exactly what I did–offering an investment property for resale while still maintaining the option to refinance, at least for the 12-month period after the property is removed from the market.

Unfortunately, for some homeowners, the implications are considerably worse. In the current market, homeowners often list their homes for sale only to withdraw them from the market because they can’t sell them for an acceptable price. With this new restriction, homeowners may face an unexpected problem–the inability to refinance their existing mortgages. This is bad news for those who have existing mortgages with unfavorable terms or who have adjustable or lower “buy-down” incentive rates that are set to adjust within the year following their attempted sale.

Planning for the Change

For both investors and homeowners who have not attempted to sell the property in the past 12 months, the solution is the same–planning. Both investors and homeowners will have to consider whether they may look to refinance existing mortgage loans in the upcoming year before making the decision to list their properties for sale. This also means taking a more serious look at property valuations in the current market before listing a property for sale to decide whether the house can sell for a price that they are willing and able to take.

Those who have listed their properties for sale and then withdrawn them from the market may simply have to wait longer to refinance or look at refinancing with a portfolio lender. In my case, I will be refinancing with the same portfolio lender that made the short-term loan–unfortunately at a higher (and variable) rate and shorter term than I preferred. For most homeowners, the better option may simply be to wait out the 12 months. Although a homeowner with an adjusting rate may have to make higher payments for a period of time, a portfolio lender is unlikely to provide terms competitive with a secondary market loan. And due to the costs of refinancing, a portfolio loan is unlikely to be a good temporary solution. The better choice may be to budget for the higher mortgage payment until after the 12-month period and then refinance with a competitive fixed-rate loan.

In the meantime, homeowners looking to refinance may want to stay in contact with their mortgage broker. As my latest refinance reminds me, the rules tend to change.