The U.S. real estate market is still down from the highs of 2007. There is a flood of real estate investors buying up properties all over to grow their real estate business. Especially in Las Vegas, over 54% of the homes under $200K were all cash deals, and by investors (many of those are foreign investors). If you have the cash to invest, that is ideal, most do not. Many will turn to alternative ways to gain the capital to accumulate “cheap” real estate for future growth. If you have a wealthy family member or friend who will loan you the money, that is wonderful, but not realist for most. You are not going to get a bank loan to buy real estate unless you typically have 20% or more down. We are not going to discuss FHA or other types of financing. In this article, we will focus on using business credit, especially vendor credit, to help preserve your cash flow, if you are looking to buy, fix up and rent out houses and increase your cash flow while hopefully benefiting from long term appreciation. I realize there is still a lot of uncertainty with real estate prices in the short term and I am not suggesting this is a good time or bad to invest. I will share with you how you can use business credit, specifically, vendor credit to your advantage if you are looking to either flip houses, buy, fix them up and sell or to buy, fix up and rent them out.
If you are doing any type of repairs, remodeling or hiring someone or a contractor to do that for you cash flow will be critical. You do NOT want to pay cash for all the repairs, materials…when you can use vendor credit.
First, let’s review the basics. After you form your LLC, the business credit bureaus automatically start building a profile on your company, without your permission by the way. The key is to make sure your entity is in compliance as that is happening automatically that means things like making sure all your addresses match in all your filings from the secretary of state to the local business license. Next, you must properly build the business credit profit with the big three, that is Corporate Experian®, Corporate Equifax® and Dun & Bradstreet®. D&B you have to pay a fee to start the business credit building process to get vendors to report. The other two, Corporate Experian® and Corporate Equifax® they can be built as your vendors report. You can check out how you are currently doing to see if any vendors are reporting on your entity for free. Go to www.budurl.com/bizcheck1 and www.budurl.com/bizcheck2 and type in your business name, city, state and zip and find out how many vendors are reporting. If you have two or less that is not good.
Here is the big problem; there are over 50,000 vendors that will grant you credit, but less than 10% report to the business credit bureaus. How does this effect your ability to get vendor credit to help you with your real estate business? The main vendors that come into play when you think of vendors to help you with building supplies is Home Depot® and Lowes®. I am a big Home Depot® fan. Both these vendors will grant you credit for your entity. The credit will be in the name of the entity under the EIN number and the debt will NOT show up in your personal credit bureau. The big question is will you have to provide a personal guarantee to apply for these vendor credit lines to help you with your cash flow as you are improving real estate to either flip or rent out. The answer is yes. Is a personal guarantee all that bad? Your goal is to avoid them. If your business does not go well and you are unable to pay the vendors and you have a personal guarantee that means they can come after your personal assets.
Both Home Depot® and Lowes® require you to be in business for three years before they will offer you a vendor line of credit with NO personal guarantee. What does be in business for three years mean? They look at the incorporation date in the secretary of state’s records to determine your business start date. Does that mean a 3 year old shelf corporation would help? This is a corporation that was filed and sat on the shelf for the express purpose to help you obtain vendor credit after. In this case, if your entity is not already three years old, this may be something to consider. In most, cases, this will only help you with vendor credit, not cash lines of credit.