Anyone here ever open enough personal LOCs to fund entire deals?

Question

I'm considering a strategy of applying for and (hopefully) opening multiple personal credit lines totaling at least $100k, and using them to fund 100% of my rental purchases & rehabs. This would be as an alternative to hard money. I'm thinking I can get personal credit lines of $20k+ from most credit unions and small banks, so at least theoretically I should be able to open a handful of those to use as cash to fund some deals (and then cash-out refi to repay).

Has anyone ever done something like this? I've never opened a personal credit line before so I have to assume there's something I'm missing and it wouldn't be as simple as I described above. Please share any thoughts and criticism.

Jay Hinrichs · Answer

just be cautious of what the open credit will do to your fico..

Chivas Miho · Answer

Hey @Sam T.- I forgot to mention the negative impact to your credit score too.  If you're going to do this, make sure to avoid opening any new credit cards.  The way the credit score system works is the 3 biggest impacts are 1) on time payments, 2) credit utilization, and 3) average credit history.  #3 will impact your credit score first.  If you open 4 lines at once, you'll drop your average credit history.  Example: you have 2 credit cards now at 10 years old and 5 years old = average credit history of (10 + 5)/2 lines = 7.5 year average.  If you open 4 more new lines now = (10 + 5 + 0 + 0 + 0 + 0) / 6 lines = 2.5 year average.  Could drop your credit score some major points, but if you have excellent credit now, I wouldnt be too worried about it.    If you need more info - Credit Karma is a great resource for free.

Chivas Miho · Answer

Aloha @Sam T.!   I did a similar strategy to what you're trying to accomplish last year.  It's difficult to obtain a single LOC in that amount you're looking for, but the way I did it was, I shotgunned my application out to several local banks all at the same time.  This way the banks didn't flag it like they would have if I had applied month after month.  I basically was approved for a total of $120k by the time they finally started denying me ($50k, $25k, $25k, $20k).

Here's the catch - you really have to read the fine print in the loan documents.  Many of the unsecured PLOCs that I have all ask for interest only (at around 10%) PLUS 2% of the outstanding principal balance.  The outstanding balance is the important key here, sometimes they wont tell you in the online account information is in the paperwork.  Let's do a quick example calculation if I maxed out my PLOCs = $120,000 borrowed at an average 10% interest rate:

$120,000 * 10%/12 = $1,000 interest due PLUS $120,000 * 2% outstanding principal balance = $2,400.  Total due to banks is $3,400.  This is where you could easily go underwater real quick while you're waiting on your refinance to go through.  Just be careful.  I have a lot of credit to draw from, but I strategically pull from it when I really need to, and never the entire amount.

Also agree with @Jason DiClemente's statement on the DTI ratio when you refinance.  When I did my first cashout refi, I told my bank the money would immediately go to paying off the LOC which was true.  I didn't have any issue, but my balance was only $40k to repay back to my LOC.

I found it best if you could borrow some of the funds from friends or family and use the LOC to cover the balance.  The benefit here is that you could ask friends/family for interest only payments (not interest plus 2% of principal)

Good luck!

Jay Hinrichs · Answer

in practice almost impossible to get those credit lines UNLESS they are secured by your real estate.

TRUE unsecured LOC from a bank is very very tough to get.. Very. at least at any large amounts and by large I mean 300 to500k ..

Sam T. · Answer

Hey thanks a lot for the info. That's interesting about the 2% mandatory monthly principle repayment. I'll have to check with my banks before I apply, since that might be a deal breaker for me. Interest only (until I'd pay it all off in one lump sum after refi obviously) would definitely be ideal for me.

Sam T. · Answer

@Jay Hinrichs @Jason DiClemente

Good point guys. I hadn't thought about that, so thank you. I'll need to ask my portfolio lender if that would be a problem. Hopefully I could just sign something promising to use the cash from a refi to repay the LOCs if it would be a problem for them otherwise.

Any other thoughts and comments anyone?

Sam T. · Answer

$300k+ would be awesome, but I'm only just starting out and would be very happy to get $100k in total credit lines. I only own one property currently which is worth ~$175k, but not much equity in it. I went to a handful of local small banks and CUs, and based on conversations there it seems like most would be willing to offer me $15k if not $25k or more in unsecured lines based on my credit and income. The goal would be to buy small residential properties for now.

I'm just trying to identify any holes in this plan before I execute it to know what I'm getting myself into.

Anyone here ever open enough personal LOCs to fund entire deals?

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