What to do with bad credit and low cash reserves

Question

Hi everyone first off very excited to be on here and excited to learn more about real estate investing. My situation is kinda weird as I started out in real estate about 1 year ago, I got into short-term rentals and have one right now that is producing about $60,000 a year and about $3,000 in profit every month other than the slow seasons. But when I started out I spent too much on furniture and had to use my credit to finance it. Right now, although the house is producing good cash flow I haven't been able to pay off my credit because I've been paying my parent's medical bills and so on and don't have much left to put back into investing. I recently also got a sales job as a life insurance producer to help pay my debt faster. Currently, my credit score does not qualify me for any loans since I am 23 with bad credit. I'm very motivated and an actiontaker. Right now, looking to find a fix and flip deal but have just really been thinking of how I would finance it: private investors are what I'm considering most. I'm also eligible for a VA loan as well if that helps me. Any advice on what a veteran investor would do in my shoes would be very helpful thank you.

Nathan Gesner · Answer

Welcome to the BiggerPockets forums!

You are making a rookie mistake of carrying debt. Your parent's medical bills may be an unforeseen hurdle, but the credit card debt was deliberate. You need to focus all your energy on becoming debt-free before you even think about investing in something else. Pay off your personal debt first, then your parents' medical bills. I would spend some time on the phone negotiating with the hospital to get those bills down. You can often get them to reduce the price by 50% or more if you really work hard.

It has been proven throughout history: if you can't handle the money you currently have, you won't be able to handle more money. Get your financial house in order, then invest from a position of strength.

V.G Jason · Answer

@Nathan Gesner told you what you should do.

You're telling us you're in a horrible financial position, and then ask us how to get financing for your next project. Do you see the issue with that?

You're not capable of managing finances. Fix that first, then go at this. I'm willing to bet you're stressed out, and I'm willing to bet if you don't change your behavior you'll be in an even more stressed spot. Do what you want, but get your house in order.

Mike Dymski · Answer

Tough crowd, given his age, success of the property, and paying parents bills.  Although, I agree with the advice to negotiate the medical bills and pay the credit card off before them.  With limited credit history at your age, the card balance can't be that high relative to $3,000 a month in profit; so, you probably can pay it off quickly.

Luke Nam · Answer

Hey, @Nathan Gesner and @V.G Jason thank you for the input. My bad credit wasn't from poor spending habits in fact I live very frugally. But I did have to use my credit to get my foot into real estate and just stuck because I haven't been able to pay it off yet with my returns from it because of my situation. After reading How to Invest in Real Estate, I was going to find a prop that had good numbers to flip or wholesale and try to find a private investor to try and get some extra cash to pay off my debt faster. But I guess paying it off first from extra rev from my new job will be the best route after hearing your advice since there is still a lot of risks. Thank you guys!

Account Closed · Answer

To me, it sounds like you cannot afford to own the property. I assume that if you have to replace a refrigerator, change carpeting, paint, etc., you’ll use your credit card. Things can spiral really fast.

Luke Nam · Answer

@Nathan Gesner and @V. G Jason I understand no excuses, I will make it my mission thank you guys so much for the guidance really means a lot!

Account Closed · Answer

I’m sorry, Luke. When I re-read my post, it came out snarky. I didn’t mean to do that.

Your original post indicates that you need to improve your credit score and that you have had a hard time paying off the credit cards you are using to support your real estate activities. Reducing your card balances to below 30% of their credit limit will increase your score a lot. I may be wrong, but you appear to be using your cards more—not less.

The other part of your post indicates that you do not have cash on hand and your parents’ unexpected medical bills “and so on” suggests to me that you facing monthly expenses that are not predictable and full of surprises. I think you need a cash reserve, independent of your real estate stuff, to protect you from any surprises.

To me, you are asking us to help you develop the best strategy to crash-n-burn. I think you should back off on real estate for a year or two, keep your day job, pay down you debt and save a bunch of money.

Drew Sygit · Answer

@Luke Nam start finding deals to wholesale to other investors.

You'll learn a lot and build your network.

Michael Haynes · Answer

Hello Luke Nam, Your a Newbie and it sometimes helps to know where you live and want to have properties. When starting out with Rentals and being single? you quickly run out of Money and Credit to do the next Deal. That is Reality. It does not matter what book you read or what course you take or what seminar you went to, the whole point of R.E. Investing is to produce Positive Monthly Cash Flow. Those are your numbers. They have to work! If not, then you are "stuck" with Reality and should stop and study with Dave Ramsey. He is the guy who will get you to start with Baby Steps on your way to being Debt Free! Dave is the opposite of Robert Kiyosaki in that he wants you to "Invest" in Stock Mutual and ETF Funds and then, only buy Real Estate with CASH. You cannot be a Robert Kiyosaki if you don't have the Discipline, Smarts, Money and Credit that he does. Same thing with Stock Investing. All the small guys think that they can do what Warren Buffet does and the Reality is that they cannot. Same thing with farming. Just because the huge Corporate farm next to your 100 acres is able to make huge profits planting Corn does not mean that you can too. That's the lesson to learn. I trade the ES Futures on my laptop. Yesterday in two hours I was up $460 trading two contracts and quit. Get it? I have big Medical expenses right now and I finance them at Zero Percent for 24 Months to make it easier for me to pay my yearly Co-pays.

What to do with bad credit and low cash reserves

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