When I first heard the advice to use credit cards as a capital expenditure (CapEx) reserve account or a vacancy reserve account, I thought it was the most ludicrous and dumbest investing advice I had ever received. Early in my investing career, I was influenced by Dave Ramsey’s conservative financial principles, which made me hesitant about using credit in any capacity. However, as my investing knowledge and experience have grown, I’ve become slightly more open to risk, even while still remaining very cautious.
One crucial aspect of investing is understanding that larger cash reserves, while safe, tend to lose value or underperform when simply sitting in a savings account. For instance, the best interest rate on cash accounts currently hovers around 4.5%. In contrast, using that cash for a hard money loan or as a down payment on a rental property could yield around 12%. This difference highlights where the concept of utilizing credit cards or lines of credit as reserve accounts for CapEx or vacancy expenses can be incredibly beneficial.
This strategy was a hot topic during a recent mastermind call. One member, who owns a successful rental property, felt stuck because he and his wife didn’t have cash reserves for their next investment. I shared my experience of using lines of credit to fund CapEx projects and cover mortgage payments during periods of financial and occupancy vacancies.
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It’s important to differentiate between financial vacancy and occupational vacancy when discussing rental properties. Unfortunately, many sellers and realtors often overlook this distinction. For example, I once looked at a 12-unit property where the owner proudly claimed a 90% occupancy rate. However, after digging into the financials, I discovered that several tenants were months behind on rent, indicating a financial vacancy closer to 70%. This revelation significantly impacted my offer, and ultimately, we chose not to close the deal.
Risk tolerance varies for everyone and can change throughout your investing career. Here’s a question to ponder: If your goal is to have $25,000 in reserves, would you rather wait on the sidelines to build up that cash, potentially missing out on valuable opportunities? Or would you feel more comfortable with a $25,000 unsecured line of credit, which only incurs charges when used?
Pro Tip: Most lenders are willing to issue a $25,000 unsecured line of credit to anyone with a good credit score. If you’re warming up to this tactic, I encourage you to apply for a credit card. Occasionally use it for small purchases and pay it off immediately. Also, save those 0% interest checks you may receive in the mail—they can be incredibly handy for future investment opportunities.
Where do you stand on this topic? Do you think using credit cards as reserve accounts aligns with the BRRRR method? I’d love to hear your thoughts! Send me a message and let’s discuss.
By exploring new strategies like this, you can find ways to maximize your investing potential while using the BRRRR method effectively. Remember, staying open to different approaches can lead to greater success in your real estate journey!
Common FAQs using the BRRRR Investing Strategy:
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With none of your own money, yes. Partnerships are the best way to grow your portfolio without using your own money. Utilizing creative strategies like Hard Money (via W2 Cap Capital LLC) will allow you to fund the purchase and rehab with only 10% down (sometimes 0% down given the opportunity).
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