In today’s financial system, cash and credit are two different things, but both are valuable as a source of project financing. You may have one but not the other! A partnership between someone with credit but no cash and someone else with cash but no more credit can be a powerful combination.

It’s possible to have a good credit rating and a generous credit line without having kept cash on hand. On the other hand, someone else may have cash to invest, but their credit lines are already maxed.

Credit is a valuable commodity in real estate investing, as it can be used for:

• Secured loans
• Unsecured revolving lines of credit
• Cash withdrawals against credit cards
• Project goods and materials

Although you may protest that several of these channels are typically high-interest financing, the same is true of hard-money lending and even seller carryback financing. Using one’s own credit can further build one’s credit rating for larger future loans and lower interest rates, which is not always the case with private lending.In fact, excellent credit ratings may secure lower interest rates from a high-limit credit card than from a hard money lender.

Good credit in addition to having equity in other properties, including one’s own home, can be leveraged into collateralized loansat favorable interest rates through second mortgages and lines of credit.The funds from these loans can be leveraged again as a down payment with hard money lenders to secure even more financing.

A simple scenario for using creditworthiness is having the cash partner acquire the property while the credit partner provides resources for more financing, goods, and materials.

Another more creative use of good credit is to have the partner with cash but no credit buy the property. The title is put in the name of the creditworthy partner who can then secure a line of credit against the property value. In return for the use of the credit, the credit partner has a share in the equity and the eventual profits, all without investing any cash.

Essential to any partnership, and especially any partnership based on one’s credit, is a sound exit plan in case things don’t go as planned. An unanticipated zoning change or a discovery of serious problems with the project could significantly change the plan and perhaps put repayment in jeopardy. Have a back-up plan for alternative financing,adding a new partner, or another creative fallback in casethe worst happens.

Creditworthiness increases the value one can bring into a partnership with someone who has cash in orderto leverage a greater equity position in the partnership. Credit can be leveraged into more available cash and/or provide goods and services for the rehab. Combining the two forces of credit and cash can create a project generating machine!

What’s the first thing someone should do when they want to increase their credit rating?

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