How I bought my first Rental Property with (mostly) credit

[David Pfeffer]

Long time reader first time poster here looking to share my crazy success story.

Approximately 16 months ago I realized I needed something more out of life (JK I just want money) and decided to start a career in real estate investing. I spent a solid two months reading every post here on Bigger pockets as well as starting my search for the perfect first property. During this time I also created an LLC to hold the property in and found a great real estate agent. After a few months of searching and getting outbid on literally every single deal using conventional financing I decided I needed a new approach.

Originally, I was trying to keep my first deal as simple as I possibly could by buying a turn key house. Unfortunately for me, every time I tried to bid on a house I either got outbid or someone had cash on hand. It was extremely frustrating because even if i found a great deal someone would outbid me. Should I just wait until I have more money so I can outbid them? No! The more I thought about it outbidding someone for a great deal means making it not so great a deal. So I needed a brand new strategy and a new approach. If there's this many people selling duplexes than there must also be a lot of people preparing them for sale. By this time I was well aware of the BRRR strategy on here and how awesome it is. I decided right then and there that I would now be looking for a house that needs work.

I was finally able to find my perfect "gem" in October of 2018. I had decided that I wasn't going to buy anything that had major structural or foundational issues since I was basically planning on contracting everything out. Sorry DIYers I have several medical conditions that would prevent me from putting sweat equity into it (wish I started at 22 rather than 32). This fits in well with my experiences from my active income s-corp IT business since not only am I a contractor myself but I also deal with other contractors on a daily basis. The house was assessed at 31k, he was asking 26k for it, I offered 24.5k and just like that (OK several long grueling months later of waiting for titles to clear and other such nonsense) my offer was accepted.

So how did I come up with the 24.5k? I took a personal loan out for 20k and worked for the other 4.5k. On November of 2018 I picked up my first rent check which totaled $1230. It was one of the happiest moments of my life. Did I forget to mention that there were already tenants in place and it was already cash flowing? The only thing I needed to do right away was put a new roof on it. I was able to find a great contractor with a 30 year transferable warranty (we didn't use regular shingles) for 22k and he got it done by the end of December last year. I financed that with a regular bank loan. At the end of December the only thing left to do was get it it's CoO (Certificate of Occupancy) and let the money flow.

So either the inspector I got really hated me / my house or my tenants are all disgusting human beings. I got about 4 pages worth of violations. It needed new paint, new windows, gutters, new siding in a few places, etc. and it had to be done by someone with their certifications. They even cited my basement floor because my tenants had to much laundry, or "garbage" as he put it. "One mans trash is another man's treasure" I replied when asked about my tenants living situation. I admit a lot of the things made sense but to tell someone that it is illegal for my tenants to put dirty clothes on a basement floor.......... Long story short I had to hire a contractor to do a LOT of handyman tasks and I never could quite wrap my head around how the guy that owned it before me got the certificate. But even that wasn't the worst of it; I got stuck updating the electrical systems for the house too and that ran me about 9k. All of this stuff was unexpected but I did everything and the house finally got its certificate.

Now when I bought the place I had a laundry list of things I wanted to do for the place. The first was replacing the driveway and making it look nice. That took about 4.5k. The next was some chimney work and redoing a retaining wall. Also, the "chimney guy" who was actually a mason did a lot of other small things for me. I wound up spending about 15k on him but everything he touched looked beautiful afterwords. I also put in several toilets, water heaters, and modernized the heating system. All in all, I put about 76k into this house. But, I didn't cut any corners and subsequently I'll probably be dead before I have to worry about anything major going wrong with the house.

So far I've told you that I have two loans; the roof loan and the personal loan I used to buy it with. So how did I finance the rest of the rehab? With something that I've rarely found mentioned on this website despite it being basically THE most important thing to an investor; credit!

So lets talk about credit. The very first thing I tell people to do if they want to invest is to start building their personal credit through a strategy called "credit gardening". You guys can google it for a way more detailed step by step process of what to do but I'm going to give you a quick summary here. Basically, you start young (thing teenager but only because that's the youngest you can start) and every two years you go on credit card opening spree. You open as many lines as you can (think seeds) and than you nurture them with small purchases and perfect on time payment history. In two years times the inquiries fall off your report and you can rinse and repeat. I started when I was 18 and when I was 30 I had ~100k worth of available credit spread out around 30ish cards with a 700s credit score. It's not an ideal source of long-term financing for several reasons but if you use them responsibly they are a great asset. Think sign on bonuses, cash back deal, 0% transfer cards; and if you pay them off on time you never pay a single cent in interest. But the best thing about credit is that it enables you to get Business Credit.

So I didn't know starting out that Business Credit Cards existed. I bought my s-corp and my llc not knowing what business credit was. So it was a wake up call when someone asked me to apply for a business credit card. I didn't have any idea what he was talking about. Basically, I was able to use myself a personal guarantor and got a line of credit for my business. Now, the cool part about business credit is that it typically doesn't appear on personal credit reports unless you don't pay it. That means that it won't negatively (or positively) affect your personal credit. Plus the lines of business credit are usually significantly higher. Oh, and at tax time you've got your business cards and personal cards to keep every business and personal purchase separate so that makes life a lot easier for you and your CPA. I could go on and on about how awesome building your business credit is but truth is it's still new to me and I could use a lot more knowledge (hint hint). I've only just scratched the surface for sure.

Anyway, I financed everything on a mix of loans, credit cards, and business credit cards. So at this time I was ready for the "refinancing" part of my project. Unfortunately for me, I only did serious, cost efficient repairs that would increase the profitability of my property for years to come(think doing the roof right once for 50 years for 2x the price of what it would be every 15-20 years). I didn't put any money into renovating the kitchen or bathroom so they could be destroyed over the years by my tenants. I didn't make anything look overly nice or cute. I was practical and every improvement I made was both cost efficient and long lasting. So of course the house assessed lower than I felt it should've at about 78k. I could go off on an hour long rant about how comical the way we assess our properties is.... but seriously guys, someone please change it to more of a credit score formula. Location, condition of critical systems, optional upgrades could all be categories with different rates. All I'm going to say is that what we have right could be significantly better by utilizing IT (you know those white boxes you've been typing into for the past 30 years but the government is still kinda scared to accept LLC publication requirements on).

Anyway, I refinanced most of my debt into a 20 year commercial mortgage and now I've finally come out the other side. I get ~950 a month in cash for doing little to nothing. To those of you on the fence about starting, just do it. It does suck at first but progressively gets better and easier the more knowledge/experience you have. Oh, and start building your credit now cause it can literary make you a fortune just like it did for me!

So guys this is my first post please feel free to comment. I would like to know what I could've done better for next time!