Ridiculousness... Section 8 Tenant Has Higher Credit Score Than Me!

I’ve been trying to find a local bank to work with in refinancing some of my rental properties held with short-term debt into low-interest / long-term (while also pulling out some cash); however, this has proven difficult for me since I use various forms of FREE or Cheap Debt (mostly Credit Card Promotional Offers & HELOC) to fund my Rehabs to Rentals – which then increases my Debt Ratio & Credit Utilization and lowers my Credit Score.

Below are excerpts of a rather frustrated soapbox email on the matter that I sent to one bank rep who was questioning if my personal debt also included business debt as it related to my DTIR & Credit Score. In this email I try to make the point that this whole FICO Credit Sore fixation that banks have is CRAZY - when it prevents them from seeing anything else... Because my Tenant on Government Assistance (Section 8) actually has a higher Credit Score than me. Total Ridiculousness!

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Hello ______,

In answer to your question about possible business debt on my personal credit… Most of the debt against my personal name and on my personal credit cards is actually business debt that I have either personally guaranteed or one of many instances where I have used a personal card to temporarily cover a business expense.

Now while I fully understand that banks and underwriters care primarily about Credit Scores, Dept to Income Ratios, and Percentage of Credit Utilization... I care primarily about Cash-Flow! In my world cash-flow is king and solves ALL problems, so I make use of a Real Estate Investment Strategy that leverages Good Debt to acquire Cash-Flow producing assets that pay for themselves, resulting in FREE assets for me.

For instance, I just acquired a Duplex and spent $2,400 on my personal Lowe's Card to buy Appliances for both units on a 6-Month ZERO Interest Promotion, so it is FREE Money for 6 month's that will be paid back by a portion of Tenant rent ($400/mo for 6 months, which is only $200 per unit).

I do this same thing with Flooring, HVAC, Foundation, etc... Taking advantage of FREE Money on 6, 12, or even 18-Month ZERO Interest Promotions, and then allow my Tenant’s rent to pay the bill each month and in full before any interest hits. It's amazing... This allows me to keep my cash on hand to use as down-payment whenever another purchase opportunity presents itself and to quickly rebuild that cash reserve after each such purchase to then be ready for the next!

But again, I fully understand that to banks and underwriters this looks like excessive debt, but consider...

(1) My properties are rehabbed to like new quality, so expenses are predictable and spread over many year of remaining useful life.

(2) I buy right so they are worth far more than I've put into them and equity is present, so I could sell if needed or cash-out refi and still have equity present.

(3) I keep cash reserves for Property Management (paying myself), Vacancy, Repairs & Maintenance and CapEx, so expenses are covered by Tenant rent as they occur.

(4) I do excellent tenant screening to protect my assets and many of my Tenants are "Section 8", so it is Government GUARANTEED income paid timely on behalf of Tenants who will likely NEVER leave my wonderful like-new homes in a great locations that they are essentially getting for nearly or completely FREE.

(5) My rents range from $900/mo to nearly $1,500/mo per unit (even for Section 8), so I have plenty of cash coming in to cover expenses and maintain the properties.

(6) I'm protected by insurance that is also paid by my Tenants / Government just like all other expenses for the property.

(7) Tenants (especially Section 8) treat my properties like gold because I have high standards, enforce my lease and inspect quarterly... Why would someone mess up their Dream Free House with above average quality finishes and amenities in a great location!? So I do not have problems with mistreatment of my properties, late rent payments, or evictions - because I know what I'm doing and do it well.

(8) And after paying all expenses, covering all debt, and keeping reserves each month - I still have positive cash-flow remaining to put into my pocket... Cash-flow that is generated by what then becomes a FREE asset for me once I pull my cash back out and it continues to cash-flow at a now infinite rate of return!

So really, what does it matter that I have $6K on a personal credit card, when it is 12-Month's ZERO interest, never paid late (no late payments, liens or judgments on me / my credit report in 28 years of having one), and the payment is covered down to ZERO over 12 months @ $500/mo by Government GUARANTEED Rental Income that generates hundreds per property of positive cash-flow each month for me even after covering this debt, reserves and ALL other expenses!?

Now I know from experience that this notion is lost on 98% of banks and their underwriters (so please indulge and forgive the soapbox response), but I will eventually find those banks and lending institutions within that 2% that can clearly see I pay my bills on time and have plenty of cash-flow to cover my debts, which are all debts that MAKE ME MONEY.

Soon, I will find a bank who looks at my cash-flow, portfolio of properties, businesses, employment, expertise and both short and long-term history to see that I clearly am a good investment, and they will offer me a large enough line of credit that I can buy good Real Estate deals as they come (including at auction), and they will then clear my line after each such purchase by refinancing into long-term / low-interest debt, so I can repeat the action over and over again - making everyone money in the process.

But if despite these truths my current debt is an obstacle that we cannot overcome at this time, I'll consider changing my strategy for 6 months or so to clear the debt and get my credit score 100 points higher - and then try again.

But it’s funny... I recently approved a new Section 8 Tenant for one of my rentals who has a Credit Score well above 800 on an annual income of less than $20K; yet my wife and I (from multiple sources) have a gross annual income over 35 times higher, plus own Business and Real Estate assets worth millions with nearly another million in equity present - but can't get a bank to work with me because I use my credit cards to leverage FREE debt to acquire additional cash-flow producing assets, and that usage causes my Credit Score to be 100 points or more below my Tenant on Government Assistance!?!

Ridiculousness.... But this summer I'm taking my family on a Hawaii Cruise that has been paid for almost entirely using credit card points generated by this very practice!

Well… Off my soap box now. Let me know what you can do, if anything. And if I cannot work with you and ______ Bank now, I'll try again when I'm holding less FREE debt and higher Credit Score later this or next year.

P.S. I recently met another Real Estate Investor who said he gave up on banks for this very reason and he now funds all of his properties using 10 to 20-year notes @ similar interest rates held within Self-Directed Retirement Accounts of individuals who are educated on Real Estate. I've already got a few short-term private lenders, so I'm sure I can find some willing to go long-term.

Thanks,

J.T.

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