Financial credibility for real estate investors

Real estate investors often don’t see themselves this way, but in reality every real estate investor is a ‘business owner’. This is because each parcel of real estate you own has its own unique location, tenants, cash flow, maintenance costs, financing, and property taxes. And yet, many investors continue to do business in their own name and use their own personal credit to purchase property. The good news is that there is a better way.

PERSONAL CREDIT vs. BUSINESS CREDIT.

Real estate investors make ‘the deal’ with the seller, but actually buy their properties with institutional lender financing or seller financing, or some combination of the two. When an investor makes a decision, it is the property that he has to qualify, not the buyer. But when it comes to financing the deal, that’s usually not the case.

In most cases, this is a personal guarantee. Lenders collect personal financial information before making a decision about your loan. They want information like your balance sheet, income statement, and a personal credit profile to make a loan decision. The higher your personal debt-to-income ratio, the greater the pressure on your personal credit. Many investors step forward and sign personal guarantees because they feel they have no other choice. However, if you use personal credit too often, you can actually hurt your personal credit score.

Your personal credit profile, whether you like it or not, is tied to your social security number and how you’ve managed your personal finances. The files kept by consumer credit reporting agencies are separate and distinct from those kept by a commercial credit reporting agency, but most people don’t know the difference and don’t understand the powerful impact that developing a credit report can have. commercial credit profile, if done well.

THE KEY IS TO BUILD A SEPARATE CREDIT PROFILE.

No matter what your personal credit score is today, it is possible to create a business credit score that is completely separate and distinct from your own personal credit. It takes planning and focus, but it can be done. With a disciplined and systematic approach, you can work to build a positive business credit score that isn’t tied to your personal credit and spending habits, and you can do it in a timely manner if you follow a specific approach.

STEP ONE: CREATE A BUSINESS.

Establishing your ‘business entity’ is the first step. For most real estate investors, the entity of choice is a Limited Liability Company (“LLC”). Today, the national trend in company formation is that more LLCs are formed in the US each year than corporations. That wasn’t always the case, but today with the IRS’ adoption of its check-box regulations, as well as the asset protection and privacy now available in states like Nevada, limited liability companies have become very popular for its flexibility, privacy, protection and simplicity of operation. (See our Special Report on Limited Liability Companies vs. ‘S’ Corporations.)

On top of that, over the last 10 years, the ‘Series LLC’ has become the forefront in the evolution of LLCs in the United States. It saves you from repeated costs (up front) on legal training and (on the back end) tax accounting. The Series LLC essentially acts as a ‘mother ship’ that allows the ‘cells’ or ‘series’ to distinguish each of the business companies (or properties) from the others, giving each the ability to have separate business activities, status cash flow and accounting. but still having the ability to consolidate at the end of the year. That can save you thousands by not having to file separate business tax returns. The bottom line is that the more you don’t have to spend on lawsuits, taxes, and financing costs, the more you have to reinvest in purchasing more real estate.

STEP TWO: HOW TO USE ‘BUILDING BLOCKS’ FOR SUCCESS.

The next step is to build credibility so credit grantors, as well as business credit reporting agencies, understand why your business should enjoy a favorable business credit score. Many people ‘assume’ that consumer and commercial credit bureaus are the same, but they are not. Let’s take a look at the major business credit bureaus before moving on to exactly how business credit should be established.

Dun & Bradstreet, Experian Business, Business Credit USA, Equifax Business, Client Checker, FD Insight together make up the vast majority of business credit reporting transactions in the United States today. The ‘big kid on the block’ of course is Dun and Bradstreet, with approximately 70 million registered businesses. The closest competitor is Experian Business, which has around 14 million registered businesses. Each of the agencies has an army of employees who do nothing more than ‘verify’ certain elements of business information, and if there are inconsistencies or questionable entries, this raises ‘red flags’ for that business, which immediately results in a lower favorable credit rating.

There are some basic rules to understand. First, personal credit scores and business credit scores have two different scales on which they are measured. Personal credit scores (ranging from 300 to 850) are linked to your social security number as a personal identifier. Business credit is linked to the business entity’s tax identification number (EIN) and ranges from 0 to 100. On the business side, a score of 75 or higher is considered excellent.

The most common mistake of all made by business owners seeking business credit is signing up with business credit bureaus ‘too early.’ That is, sometimes they do it before they have all their “ducks lined up” and verified by an independent third party. They believe that by simply registering with the major business-related credit bureaus, they can start applying without a red flag being raised. That is why it is so important to take specific action steps before registering with the business credit bureaus. So the key, of course, is to get all the ducks in a row before sending a record to Dun & Bradstreet. The sequence must be followed meticulously so that each step expected and verified by the business credit bureaus has been previously advised and previously verified. Where personal credit can be ‘repaired’ if there have been problems in the past, there is no such equivalent in the world of business credit. That’s why it’s important to ‘do it right the first time’. After all, the goal is to acquire a solid business credit score in the shortest amount of time, right? Looking at the big picture, the proper steps in the right order are as follows:

o Formation of a Corporation or better yet, a Limited Liability Company

o Obtain an Employer Identification Number ‘EIN’. This is obtained through the Internal Revenue Service (“IRS”) and can be done online.

o File a DBA (‘doing business as’) form if the business will be doing business under a name that is different from the business or legal name. The DBA is normally filed publicly in the county where the business will operate, and in some localities publication in a ‘newspaper of general circulation’ is required.

or Business License. A business license is required to operate a business in almost all cities and most counties. A new business may also be required to obtain certain permits depending on the type of business.

o Business Registration in the Tax Department. Typically, this is a step to comply with local business tax requirements or sales tax permits.

o Office of the Assessor. Depending on your location, the County Assessor’s office may need to issue a release for you to comply with local assessments due to use of the property.

o Zoning Ordinances. These may be applicable depending on the type of business. It’s best to check with the City and not overlook this so it doesn’t show up later and create a red flag of compliance.

o Address and telephone number. Make sure the business address on all documents is the same between the state, county, city, and phone company for your directory assistance listing. The credit bureau will check to see what your directory assistance address is and if it is the same as the one shown on your licenses, permits and mailing address. If not, that creates a ‘red flag’.

o Prepare a business financial statement and include it with a properly prepared business plan that would make sense if you were lending money to a third party.

STEP THREE: BUILDING CREDIBILITY.

The final step in creating business “business credit” is to establish a foundation for a favorable rating early on. Instead of using your individual personal name and social security number, once your business is registered, any credit report must be done using the name of the business entity and your employer identification number (‘EIN’), which is the commercial equivalent to personal social security. number. ‘Trade credit’ is often underestimated. It is actually the largest source of financial loans in the world today due to the large amount used in real estate development, shipping, freight, construction, etc. Many business owners are frustrated by the seemingly slow pace at which they are able to obtain business credit. Often the reason they are frustrated is actually caused by them. That is, they ‘start’ the wrong way, and these initial errors in basic setup often cause ‘red flags’ to be issued by the business credit reporting agency.

After completing these preliminary steps, your business will be ready to begin work on building business credit, but not until then. As you prepare for lines of credit, you want to start testing payment history with companies that will report business credit on behalf of your business. My advice is that you would be wise not to register your business with any of the business credit bureaus without first considering using a professional coach familiar with this area.

To be honest, a certain amount of ‘holding hands’ can be the fastest way to learn from the mistakes others (before you) have already made. That way, you won’t repeat them, and you won’t waste time brushing off your business scraped knee to start over. This is where there is no substitute for experience and knowledge. That’s why working with an experienced business credit coach might be the smartest way to go if you want to do it quickly and efficiently and achieve the kind of high business credit score you’ll want if you’re serious about building wealth through your business. real estate business.

I often get requests at workshops and conferences where I speak across the country for more information and referrals to quality providers. If you’d like to get started, email me and I’ll show you how to get started down that road with reputable and ethical “do it right the first time” training.