Homebrew Credit Arbitrage

[hakrjak]

I see there are a couple of books now available on the subject, and I was wondering if anyone here has tried or been involved in this.

Basically, Credit Arbitrage involves borrowing money at one interest rate, and loaning it at a higher interest rate. The more money you can borrow at the higher the rate and the bigger spread you can create, the more money you can earn.

Some of these books on Amazon, etc -- suggest that you use your credit cards, if you have excellent credit and can secure some 0% financing for 12 months (Example).

Ideas on how you can turn this cheap money into big profits? The floor is now open...

Here is one of the books I'm refering to:
How To Take Advantage of the People Who Are Trying To Take Advantage of You: Credit Arbitrage
[ame]http://www.amazon.com/How-Take-Advantage-People-Trying/dp/1600200419/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1207152785&sr=8-1[/ame]

Cheers,

- Hakrjak :coffee:

 

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[Edge]

I think a lot of people have tried this with loaning on Prosper. I just don't really like the lack of transparency with the prosper set up, but some people like the ease of diversifying across multiple borrowers.

I am currently considering using my available credit lines to loan out as hard money to rehabbers. I'm considering loaning up to 65% ARV to people I have worked with in the past and on deals where rental rates and demand supports that price. Looks like I could charge 5 points up front and 15% on a 6 month term. Worst case scenario would be me owning a rehabbed house at 65% of value, refi, rinse, and repeat.

I have used credit card advances to chase investments in the past, but until now i've kept it available as dry powder when needed. I consider available credit as my reserve funds.

 

[phlgirl]

I have never done anything like this personally but I do know several guys who act as Edge mentioned: use HELOCs, credit lines, to fund hard money transactions, which are always secured by RE.

They have their own appraiser view the property and typically will only loan up to 65-70% of value.

I have seen anywhere from 0-4 points and 10-15% interest.

I would not recommend lending unsecured debt in this manner - but that is just my opinion. Even when secured by an asset, you need to be ok with the fact that you might just become the home owner (asset owner).

Bottom line - I think this tool can be very powerful, if implemented with STRICT rules and guidelines. Often, lenders will charge more points/higher interest rates on the first few deals with a borrower. Once they have a proven track record, they might drop a point or more and lower the rate. You must have exit strategies for even the worst case scenarios.

***One other thought - a hard money guy we did business with in the past (who has been in the business a long time) requires that you bring a canceled check to closing. He does not wait for payment but instead, requires that it be directly withdrawn from your account. Something tells me that he might also do this so that he has your acct information, should he need to take legal action in the future (depending on state, your bank accounts can be seized/frozen, etc.).

 

[hakrjak]

Yep, using your good credit to turn around and lend hard money has been something I have considered for a very long time. Problem I ran into when researching it before though was that it was very hard to find people in need of money who are coming up with these 65% LTV deals.

- Hakrjak

 

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[Talkintoy]

You can use your credit card money for some other stuff also not only lending money to people. One way i've used to build my credit before was when I had credit card offer of say $1000 @ 16.99% first time credit user. I'd borrow all the cash against it and used that same money to pay it monthly this way it'll show the bank your paying monthly. Then usually the banks evaluates your credit 3 to 6 months and raise your limit (since your paying monthly ontime) and offer you with another lower rate offer say $2500 @ 12.99%. They do this in hope of you take the money or charges while 16.99% is active and goes in back of the new offer making it against you. You pay the lowest % before high % making them money. Since you still have the money from original cash withdrawal you would use all that money and payoff the original $1k that you borrowed against when there's new offer. Then you turned around and borrow the $2500 again and repeat the process and time will come they will offer you 0% for 12 months etc... @ $20k! You repeat this process. The withdrawal $ you can use to buy something that makes money and give back the money back to bank monthly wise. I call this buying your good credit to build yourself. Usually takes about 1 to 2 years? :smx2:

 

[australianinvestor]

An important consideration when doing this is the cost of defaults. How will a default effect your profits? Lost money takes a while to recover. If you charge high interest, you'll probably be dealing with lower-grade debtors, which means the default rate is higher. If you are charging lower interest to more trustworthy debtors, the default rate goes down, but defaults take longer to offset. Lost cash is expensive! So, the motto of my post is to make sure you don't lose your money!

Eg: for a loan, if legal in your area, take title to something NOW, eg: a car. If a borrower wants $5K, get him to sign over the car now so you own it now. If he defaults, send a tow truck to pick up YOUR car and drop it off at the nearest trade-in place. You know what I mean

 

[Hoop]

I am currently considering using my available credit lines to loan out as hard money to rehabbers. I'm considering loaning up to 65% ARV to people I have worked with in the past and on deals where rental rates and demand supports that price. Looks like I could charge 5 points up front and 15% on a 6 month term. Worst case scenario would be me owning a rehabbed house at 65% of value, refi, rinse, and repeat.

I have seen this business model: http://www.ncrehabfund.com/

 

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