Today’s question comes from Jake and Jake says, hi, Marco, thank you for the great podcast I’ve been listening for several months. Now, I purchased my first two rental properties in June of this year. I also refinanced my primary residence and plan to borrow from my 401k to purchase additional properties. By the end of the year, my goal is to have between seven to 10 properties around the new year with my longterm goal of building a 50 door portfolio in approximately 10 years’ time.
That’s a great goal, Jake, and congratulations on getting started and having that momentum.
So he goes on to say, I have been researching methods of acquiring additional properties for when my pot of cash runs out. I came across a company called fund and grow who advertise getting business credit cards with 0% interest for one year. I understand the power of leverage. So this idea is intriguing, but I have concerns with becoming over-leveraged and with this method being speculative and relying too heavily on appreciation. Is there a place in turnkey investing with business credit cards?
Respectfully – Jake
Well, Jake, this is a very good question. I understand your concern and your obvious desire to grow your portfolio as quickly as you can. What’s interesting about your question is I’ve received several similar questions from others. So if I don’t cover everybody’s question that has emailed me about this. The general answer and concept is the same here. So first of all, I like the fact that you use the word speculative because I don’t want you speculating. I want you to think logically about your real estate investing, be considerate about the property itself, the location, the numbers on the property, what you have today versus what is expected over the next year or so, just be methodical and thoughtful in your investing.
Don’t be emotional or irrational, and you’ll certainly save yourself a lot of grief and headache down the road. The other thing you mentioned here is about being over-leveraged and that’s actually my concern leverage is a two-edged sword. It’s useful. It’s powerful. It can be your best friend. It’s great when used properly, but it’s no different than carrying around a sharp knife or a gun or any other dangerous item. If you don’t know how to properly use it, if you don’t have the experience or the knowledge or the maturity for it, then you can get yourself into trouble. Now I know many investors who have purchased properties with literally 0% down, meaning that they finance the entire purchase. I’ve done this myself many times over the years. I did this just last on some property. You just have to know what you’re doing and think it through.
And if you’ve never done it before, it doesn’t mean you can’t do it. You just have to think about it properly thoroughly and logically, like I told you, but my first caution is just, you know, the danger of overleveraging. You won’t get into that problem of being over-leveraged. If you avoid the problem of over-leveraging for the wrong reasons. So know what you’re doing and plan it properly because if you know what you’re doing, you can get more property sooner and ride that out to the point where you can either pay off the additional leverage that what you use for your down payment, or you can be in a position where you’ve either an added value or you’re in a strongly appreciating area, neighborhood market, whatever it is that you can now refinance and pay off that second loan or that extra leverage with a new first mortgage.
And now you have essentially a stabilized property. That’s cashflow positive with only one mortgage on it. And you’ve paid off the extra leverage that you use to acquire that property. Now, when you do this, you have to have the expectation of paying it off within a certain period of time. And the answer to that is it depends as far as the length of time, it could be two years. It could be as much as 10 years. I think a reasonable expectation would be to have that extra day. It paid off within three to five. And I say that partly because, and maybe largely because you can control a property and make changes to increase your rents within that period of time. And also if you have a fairly good grasp on what that neighborhood or that location or area is doing currently, and there’s a high probability from what you can see that growth will continue because of lack of supply or high demand or just growth you’re in the path of progress has many markets are, let’s say, for example, a new market we’re bringing on, which is the greater San Antonio market, a market we’ve been in several times in the past very successfully.
And the people who invested there have done extremely well on the appreciation side. They’re still cashflow positive, of course. But if you know that’s going on, then you can, can stack the deck, okay. In your favor, you know what the odds are, probabilities are of things panning out for you. So you can refinance, but have an expectation, have a timeline in place. So ideally you want to refinance or pull your cash out within three to five years, but depending on what’s going on and other factors, it could be from two to 10 years. Another thing I want to say is look at the returns now and what you expect in terms of returns in the future. And what I mean by this, as this, if you are getting an 80 mortgage on the purchase of a property and you’re borrowing the other 20%, let’s say from a business credit card or a business line of credit, or some sort of credit line of credit that you’re talking about here, and you are still cash flow positive after being fair in deducting vacancy and maintenance and repairs.
And you still have, even if it’s breakeven, but you still have control and predictability and what your cash flow is going to be month to month and year after year, then it may still make sense, but know the numbers and take a look at what your returns are. Look at it from a percentage perspective, but also, and maybe more importantly, look at it from a cash flow perspective. What are the real dollars coming down to the bottom line? The hypothetical example, let’s just say that your mortgage payment plus the cost to service the debt of that borrowed capital from your line of credit or business credit card nets, you a fair zero that’s after factoring in and budgeting for everything else. Is that worth it? Well, it could be. I mean, if you’re not in a cash crunch, you know, you’re not desperate for funds, you’ve got savings, you’ve got, you know, a good income you’ve got reserves.
If something, a bad situation were to come up, you’d be able to take care of it without a problem. Then having low to no cashflow is okay for again, a fixed period of time, a certain period of time, two years, three years, five years, whatever is within your investment plan. But the only way and the only time you would want it do something like this where you don’t have cash flow is of course where you’re making it up elsewhere. Now, certainly, you’re going to get returns from the amortization of Shalom. I’ve talked about it in previous episodes where the average rate of return from the amortization on a 30-year fixed-rate mortgage if you actually average it out over the full 30 years is 13.3%. And you’re actually ahead of the game even in the first year. Although granted, the amortization is very small in the first few months in the first year.
And so on every month, it increases a little bit at a time and you’ll see that that starts to go from four to 5% to 6% to 7% per year, as you work it out. And I’ve done this in a spreadsheet. So, I mean, you could, if you like playing with numbers, you can do this yourself. Let’s say you’re in a strong market and everything points towards that market continuing to grow and be stable and strong and grow in terms of property values. And I’m not saying you should speculate or count on appreciation, but let’s just say that’s actually happening. Well, you’ll have a zero or a very low return on the front side in terms of your cash flow, what we’ll call cash on cash return. But you’ll make that up in the unrealized gains in the property that is in the equity itself, the equity that happens month to month, year to year, and that can ebb and flow.
It will fluctuate. You know, I mean the country goes through recessions, local market. Let’s go through real estate cycle. So it will go up and down, up and down. But if overall that is positive and if it’s a healthy number, well, then you’re making out very well because you will reach the point in, let’s say whatever two, three, five years where you can refinance and assuming rates are still low and they’re expected to stay low for the foreseeable future. I mean, the fed and the federal government is not in any rush to raise rates at this point in time, but who knows, you know, things could change after the election, but let’s just say, rates stay historically low. Then you may be and should be, but maybe in a position where you could refinance and pay off that business line of credit or those credit cards.
And now you are ahead of the game and you just bought yourself two, three years worth of time getting into the property now instead of waiting down the road and benefited in other ways. So this is all about the returns, the cashflow, and whatnot. So analyze that, but the biggest suggestion, the biggest tip that I’m going to give you and caution at the same time is run the numbers, run the numbers, and run the numbers, make sure that you pencil it out properly and analyze this and look at this and run it under different scenarios. By the way, I just went to a credit card calculator online and I took a look at a $20,000 advance on a card. And this is the other thing to you. You have to make sure that you’re not being charged high rates of interest because you’re borrowing money. It’s not typically a purchase that you’re making when you’re taking cash out on a credit card, a business credit card, although check with your credit card or the one you’re looking at to make sure that you’re not charged like 16% or 18% interest for a cash advance.
See that whatever line of credit you’re drawing from actually has nominal rates that you can borrow from. And this is where lines of credit are a much better choice than a credit card, but there are business cards out there for 5%. So you should be able to find something that’s between three to five to 7%. But if you can control the payment and let’s say it’s $200 a month on a $20,000 advance, that could take you 13 years to pay off if you just amortized it. But what you could do is you can factor in that $200 a month, that monthly payment on that line or that credit card against your cash flow. So if you are sitting there with, let’s say 300, $350 a month in net, net cash flow, and you subtract the 200 while you still have a hundred or 150 leftovers, you’re still cashflow positive.
It’s not much, but it’s enough to keep your property moving forward because you’ve got everything else covered. And now you are able to essentially finance it 100% or close to, which is an infinite rate of return. That’s infinite cash on cash return. And if you can refinance and pay off that borrowed money in a few years, then guess what you are now ahead of the game with a property that now is cashflow positive with a traditional conventional mortgage and you have cashflow. And anyway, I don’t advocate this method for everybody. It works. People do it all the time. Not a lot of people I’d say a smaller percentage, but it is a doable strategy. And it really comes down to having a comfort level with what you’re doing running and analyzing the numbers, avoiding a situation where you are speculating and just having a confidence level in the market and the property and the management team.
So you have some expectation of the predictability of that income from the property and the stability of it over the next several years. However long you want to run this. Alright, long answer to your question, but Jake, I hope that was helpful. And also for the other people who’ve written in asking about business lines of credit and credit cards, this is essentially the same type of answer.
Alright, well, I appreciate the question. Thank you for listening. If you have any questions about real estate investing or finance, shoot them over to me, just go to our website, which I hope to rebuild here soon, and remember to subscribe. If you’re a new listener to the show, share this with likeminded people, your friends and family would probably thank you for it.
That’s it for today. Thank you for listening. I will see you on our next episode.
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