Follow me:

Mindset & Money | Character, Collateral & Credit

Play episode
Hosted by
Mike Ayala

On this episode of Investing for Freedom, Mike talks about the three C’s, character, credit and collateral. Mike explains that many Americans live and die by their credit scores, but credit is actually not as important for securing a loan as collateral and character.

“Credit score remains important, but I think it’s least important of the three. The collateral and the character become the most important the further you progress in business.”


0:00 – Intro
0:55 – These three C’s are very important when you’re borrowing money
1:30 – The more business and real estate you own, the harder it is to have an 800 credit score
2:05 – Having an unsecured line of credit can be used as leverage to get a deal done
3:13 – The credit portion of the 3 C’s is less important than the other two
3:57 – The banks are mostly interested in collateral
5:18 – One time Mike needed a line of credit, but his mentor lent him the money for 40 days based solely on character
6:27 – The collateral and character become more important
7:17 – In seller carry situations, it’s is very seldom that they check your credit


Thank you for joining me on the Investing for Freedom Podcast. Today I’m going to talk to you about the three Cs, character, collateral, and credit. So, I had a mentor, I still have a mentor. His name is Barry Lipparelli, and he was on a previous episode. And we talked about this a little bit, but it’s something that I wanted to dive into a little deeper. I’ll never forget, you know, the first couple of times that Barry talked to me about this. The three Cs are so important when it comes to borrowing, lending, business, anything. And you’ve heard the saying, you know, people do business with people that they know like and trust. Well, that’s the character part of it. And what’s interesting in this day and age you know, all of our borrowing, our credit cards, our houses, the average American thinks in terms of credit, what is my credit score?

And it’s funny when I joined The Real Estate Guys mastermind, I’ll never forget Robert and Russ talking about the fact that this was probably the first time that I felt somewhat normal. I heard them talking about the fact that, you know, the more and more business you own, the more real estate you own, it gets more and more challenging to have an 800 credit score. Like I can’t even imagine having an 800-credit score and I’m opening myself up here. But the reality is as business owners, as real estate investors, we’re on the hook for a lot of debt. And that might sound scary to some of you guys, but it’s not scary because it’s leverage. And I’m not saying that we should get into bad debt, which is a conversation for another day. But if you leverage good debt lines of credit, etc., that can really help you get a deal done.

So, for instance, Kara and I have a line of credit. It’s an unsecured line of credit that we’ve had for years out of Nevada. It’s unsecured, meaning there’s no collateral other than my personal name. And we can use that for business. You know, if I’ve got a deal that hits my lap, I can get a deal done that other people can’t because I have an unsecured line of credit. Now, that being said, it hits my personal credit, which, you know, if it depending on what you’re using and when you’re using it, that one line of credit could make my credit score, jump or drop by 75 to 100 points, literally.

So anyway, the credit piece is what most of us as Americans and even probably people in general around the world, although as a side note America is one of the few countries where you can go and get a 100% loan on your residence, a 90% loan, a 30-year mortgage in general. I heard a statistic the other day, I think in New Zealand like, only like 14% of the population has a mortgage. Again, conversation for another day. But we keep score in terms of credit score. And I would argue of the three Cs, the credit portion, while I’m not saying it’s not important, it’s the least important. And Barry Lipparelli taught me this. The character piece is number one in his book, the collateral is number two and the credit is number three.

Credit is a score that shows how well you’ve paid in the past. It’s a lagging indicator, right? So, it’s an indicator of the past. And by the way, so is collateral. And so is character to some degree. Just because somebody has lived in character for the last 20 years, doesn’t mean that they don’t make a mistake or do something wrong or get into a situation where their credit character falls off a cliff. So, you know, that could be a lagging indicator too, but the thing that most, as we move further into real estate investing and business investing in that kind of stuff, the banks are mostly interested in the centerpiece. Obviously, your credit score is important to them, but the collateral is more important. And as you get further again into real estate investing, you’re going to move from a spot to where, from where they’re using your personal credit. And you’ve probably heard this before. You know, banks requiring you to sign a personal guarantee on an investment property or a personal guarantee on a business loan. Eventually you’ll move past that because the collateral is enough to where the banks are more interested in the collateral than they even are your credit and your character. And that’s a true story. That doesn’t mean that they don’t bring your character into play and your relationship with the bank doesn’t matter and that your credit score doesn’t matter, but it’s not as important.

You’re probably not going to be able to go out and get, you know, a $40 million loan on an apartment complex if you have a 550-credit score. Now I guess if the collateral was worth a hundred million, they might still loan it to you, but your credit score is probably not going to be 550 at that. So, and I’m not, you know, when I said that I don’t have an 800-credit score, I’m not saying that I have a 550-credit score either. It’s just really hard to get that pristine credit score.

So, character, collateral and credit. I really want you to think about this. I’m going to just kind of button-up with this. Barry told me one time. So back to the story I started to tell in business, you know, we have a lot of receivables that we have to finance, etc. So, one time I needed my line of credit to rest and we were waiting on a bunch of money from some of our big clients. And so, I go to my mentor and I’m like, Hey, I need to let my line of credit rest. And he’s like, well I’ll loan you the money for 30 days, which is how long the line of credit needed to rest. And he’s like, we don’t even need to do the paperwork, your character is enough. And so, he didn’t need collateral. He didn’t need my credit score. My character was enough. We had done enough deals together to where he just lend me the money for 40 days or whatever so that I could let my line of credit rest for 30. And the thing that I want you to thinking about the reason why I’m even sharing this, again, credit is our number one scoreboard as Americans, because we think in terms of consumer debt. Credit cards, home loans, vehicle loans, those are all bad debt doodads as rich dad would say. When you shift over into the investment world, I’m not saying your credit score doesn’t matter, protect your credit score. But what I am saying is that the collateral and the credit become more and more important.

This is why so many people find deals with seller caries because the seller has, he’s in the first position or she’s in the first position. They’ve still got the collateral of whatever it is that they’re selling to you. And so, it is a win-win because they no longer have to operate it. They’re probably selling it at an appreciated value. They’re probably getting interest on the money that you owe them. And they’re saving taxes because they’re not paying, you know, say it’s a million-dollar building. They’re not having to see your CPA on this. I’m not a tax advisor, but they’re not having to pay that full tax hit at once. They sell it for a million dollars, they get 20% down. They carry the note. They end up getting 5% or 6% or 7% interest over 10 years. This is a win-win scenario. For them, obviously in seller carry situations, very seldom do they check your credit, which is kind of interesting. Because they know they have collateral and they probably know your character to some degree, they’ve probably looked into you or they know you, or they at least know that you have a track record and they might check your credit. But a lot of times that doesn’t happen.

So, character, collateral, and credit, as we begin to become more sophisticated in business and real estate. I just wanted to share that with you because some people would live and die by their credit score, but as you move further into investing in business, and again, I’m not saying don’t take care of your credit score, don’t pay your bills or don’t get too much debt. Your credit score remains important, but I think it’s least important of the three. The collateral and the character become the most important the further you progress in business.

So hope that helps and spawns some thinking in your mind. Credit score is not the most important thing in the world, your character, and the collateral, and the deal is what lenders, banks, sellers, etc., are looking for. Go out there and have a great day.

More from this show

Episode 83