Thoughts on using vehicle collateral funds for real estate investing

[Brandon Gamblin]

Ok guys.... Here the situation...

I'm strapped for cash. I need a loan to put into my real estate business but my credit is not good and in the process of being rebuilt. I've tried and tried to get a personal loan but things aren't working out like Id hope. But I'm not giving up hope!!! 

I paid off my car about a year ago, and despite believing heavily in not having a car note (At one point I had three cars and paid all three off) I might have to put up my car for collateral just to get the funds for a real estate deal that I'm trying to buy creatively, as well as use the funds for some operating expenses for the business. 

I've looked into putting my car up for collateral, but the issue is, UNFORTUNATELY, these banks are STILL looking at my credit!! Even with a job, the banks are still accounting for it and, to be honest, I'm not happy about it at all. Frustration has sent in and I sit and ask myself, "then what's the point of a collateralized asset if my credit is still being looked at??!!!" 

So I now set myself to find some private lenders who lend outside of institutional underwriting guidelines, and according to their own guidelines. Maybe there are some PRIVATE lenders out there who will lend based on my car? Like they would real estate? I don't know.

But that's why I've come to this forum. To get the thoughts of financial and real estate geniuses about this situation of mine. And to hopefully steer me in the right direction. 

Thoughts?  

[Randall Alan]

@Brandon Gamblin

Broadly speaking, "You" and your credit score are always going to be a factor in almost every traditional lending decision- regardless of the type of lender.  All traditional lenders rely on metrics around what a good risk looks like.  In short, they look at their failures and say, "These criteria didn't work, so we want to avoid lending to people with 'those' criteria."  They use metrics like credit scores, debt to income ratios, income, cash reserves, etc.  

One big thing they tend to consider is that if the income from the property you buy with the money they lend were to stop - could you still pay their loan?   So if your renter didn't make their rent payment this month and just started squatting in your apartment waiting for you to evict them (I have 2 right now who can't pay their rent) - will the lender's loan still get paid?  Do you have the cash reserves to still float in that situation - having to pay out an extra $1000 - $2,000 a month for 2-3 months while you got that tenant out, and a new one in?  If your answer is "no" to that, you probably aren't ready to be buying a  property.  Those situations WILL happen.  

Private lenders are really no different in their evaluation of you, and you would be too if you were a lender. Think about it... someone off the street you don't know asks to borrow $10,000 from you (as a random example).  Do you make the loan blindly? Do you care about their borrowing past?  Whether they have flipped a house before and made a profit?  Do you care they defaulted on the last  loan someone made to them? Filed for bankruptcy perhaps?  Yes!  Private lending companies allow you to get around some aspects of traditional lending (like how many loans you have - where Fannie Mae has restrictions there)... but they ARE going to look at your track record, and they are also ALWAYS going to make sure you have money in the game too.  They don't lend 100% of the funds... and they also don't just hand over the funds all up front.  For a flip they will often dole out the funds as the project progresses. 

DSCR (commercial) loans are a little more forgiving at looking at you. They tend to look more at the asset... but I still had to do a full financial disclosure and they essentially did their evaluation of risk of lending to me - even though I had a number of properties already owned. They adjust their interest rate based on the risk they perceive from lending to you.

Just the fact that you are looking to re-indebt your car sort of says a lot about your situation.  First off, that is going to work against you in the long run.  What you need (ideally) is no car payment AND available cash to invest.  By getting a loan on your car, you raise your debt to income level - which moves you away from being able to qualify for another loan.  The amount of money you can get on a car loan - barring it being a 6 - 7  figure car - likely won't put you in a position to effectively invest in real estate if I had to guess.  And if it is a high dollar car you should sell it, buy a $10-20,000 car, and get your money that way! 

Most lenders who will lend on a vehicle are not going to be giving you good terms... they are sort of right next to the payday loan 'sharks' out there.  If you want to keep your car, you are likely best to avoid going to them... because, after all, that is another loan you have to pay back as well, and probably at a high interest rate.  

My best suggestion to you is to evaluate all your expenditures and look where you can start saving up money.  Maybe it's taking the $40 you would spend to eat out once a week, and putting it into a savings account and gradually build up your savings.  Just that $40 example is $2,000 a year.  If you can live lean for a year it wouldn't be out of the realm of possibilities to save up $10,000 in a year toward your goal.

At the end of the day, the real estate game takes a fairly significant amount of money to play. Your best bet is to buy your own home first.  That can be an investment home as well (ie. duplex, triplex, etc. where you are in the 'game').  Starting yesterday (Nov. 18, 2023) Fannie Mae introduced a 5% down requirement on multi-family homes with easier qualification requirements.  I would take a serious look at those.

One other possibility might be to lean on a family member that might have funds available; or who wanted to partner with you?  It seems obvious you recognize the potential of being in real estate.  Your next step needs to be figuring out how to position yourself to get into the game, and that takes  free and clear dollars.  I don't think the loan on the car is the right way to get there, as it (1) likely won't give you enough money to be able to play the game; and (2) it actually works against you from a lender perspective.  They say that real estate is a get rich slowly scheme.  It will still be here in a year (or whenever).  If you are lacking the income to play, you may want to take a longer approach and say, "The first thing I need to do is get a better job that gives me more disposable income I can put towards real estate."  Then you have to use discipline and not spend all the new money and save some towards your real estate goal.  Life also has a funny way of dropping dollars in your lap sometimes.  Maybe it is a tax refund, or an inheritance, a bonus or raise at work... maybe one of those comes along?

I applaud your enthusiasm for wanting to get into the game, but I think you need to take a broader look at your situation and assess whether you are ready to jump in yet.  I don't think putting your car up as collateral is going to be the best move. 

All the best!

Randy