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Should You Fund Your Investments with a Credit Card? Heck No!

by Paula Pant on May 8, 2013 · 28 comments

  
Credit Card

Imagine: You’re a beginner real estate investor. You want to flip a house for the first time. You don’t have much money.

Someone recommends that you get a Home Depot or Lowe’s credit card, which offers 0-percent financing for 12 months, and use that credit card to fund the material purchase costs for your flips. What little cash you have can be used to pay for labor (and/or your own sweat equity can be used for labor). You’ll presumably sell the house within a few months, use the profits to pay off the credit card before a single penny of interest is due, and pocket a decent payout, as well.

Should you do it?

In my humble opinion: Abso-freaking-lutuely NO.

No, no, no, no, no.

I don’t have insanely strong opinions when it comes to most real estate investing topics. If you ask me if you should flip houses, become a landlord, try wholesaling or stick to REIT’s, I’ll shrug and say, “Well, that depends.” Then I’ll walk you through the pro’s and con’s of each. If you ask me if you should buy rentals in stable vs. shaky neighborhoods, I’ll tell you that it depends on your goals and risk tolerance.

But I’m a fundamentalist on the issue of credit cards. I firmly believe that if you can’t pay a credit card in full, immediately, on the same day that you make a purchase — don’t use it!

Why? I can explain my stance in one word:

Risk

You hope everything goes according to plan. You hope that your labor and material costs are close to the amount you estimated. You hope you don’t find any nasty surprises. You hope the city inspector doesn’t throw a wrench in your plans. You hope you can sell the house in the amount of time you estimated, for the amount of money that you estimated.

Oh, you know that not everything goes according to plan. So you made conservative estimates. You tacked a 20 percent margin of error onto the material and labor costs. You pinned a 10 percent margin of error onto the after-repair value. And you hope that those margins of error are sufficient.

But hope cannot defeat the reality of risk.

ANYTHING could happen that might derail your plans. The city could condemn your home. A major earthquake could cause your home to collapse and insurance could refuse to pay for the damage. Or Wall Street financiers could buy sub-prime mortgages and sell them to Norway as AAA-rated collateralized-debt obligations, feeding a complex chain reaction that results in housing values plummeting by 50 percent.

All those situations sound far-fetched, I know. But sh** happens.

If you’ve borrowed at reasonable interest rates (e.g. single-digits), the fallout from risk-gone-wrong won’t be as bad. It’ll still be a setback, of course, but assuming you’ve leveraged wisely, it will be manageable.

If you have tens of thousands in debt on a credit card which suddenly escalates into a 29 percent interest rate, though, you’ve dug yourself into the deepest pit of a hole that’s going to be excruciating to climb out of.

When Can I Use a Credit Card?

Refer to my rule: Don’t use a credit card unless you can pay the bill in full, immediately, on the same day that you make a purchase.

If you have $20,000 sitting in a savings account, earning 1 percent interest, and you want to make a $20,000 purchase on your credit card at zero-percent interest for a year, go ahead. You have the cash in the bank to pay the credit card in full at a moment’s notice. And you’ll pocket the 1 percent spread. Congratulations, now you have an extra $200.

(Personally, I’d spare myself the trouble and just pay the card immediately, but if you want to pinch pennies, be my guest.)

But if you don’t have the cash on hand, don’t subject yourself to the risk of getting hit with high-double-digit interest rates. It’s not worth the risk.

Related (Counter) Post: How to Buy Real Estate with Your Credit Card

Photo: Ciaran McGuiggan

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{ 28 comments… read them below or add one }

Jeff Brown May 8, 2013 at 1:31 pm

Hey Paula — It will forever remain a mystery as to why this topic is even open for debate. Often times I’ve read authors who endorse the purchase of real estate via plastic, while almost simultaneously and vigorously lamenting actual real estate loans of which they vehemently disapprove. Human nature never ceases to amaze.

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Paula Pant May 9, 2013 at 10:02 am

Thanks Jeff!! Glad we’re on the same page!

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lisa May 13, 2013 at 11:26 am

I would have to disagree. Last year, I successfully used the 18 mo free financing offers. it gave me breathing room, and now the investment is paying for itself. If I took your advice, I would not have 4 houses today, I think your point is your viewpoint, but others have been very successful. Then when I pay off the total when it comes due to avoid interest, then I use that open line of credit to fund other projects. With things like automatic payments going in way before the due date, you can mitigate being late just like you mitigate being late for your own mortgage. I am very surprised to hear so much confidence in *your* opinion that you’re way of not using line of credit is a superior option. As I do use them,m I think your opinions need to possibly be toned down to spark discussion, not for me to have doubts about your future articles. Like the low income housing question, this is not right way or wrong way. Financing purchases with line of credits, that is up for discussion too as people have been successful on both sides of the issues. There is also a biggerpockets article that I thought was excellent saying the exact opposite of what you are putting forward about 1 month ago (couldnt find the article, but i remember reading and posting on it with my own success in that area). Real Estate is flexible, there is no one person who is right all the time, and others that have taken a situation that they thought was insurmountable and came off on top.

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Jim Pratt May 8, 2013 at 1:45 pm

Paula, as far as buying property, I agree. In rare occasions it might work. I purchase all my materials for my investments with a credit card (perfect record keeping) and just one check to write out each month, use to be around fifty. The credit card is use as a tool, don’t have to carry large sums of cash or document my ID for each check I write.

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Paula Pant May 10, 2013 at 9:34 am

@Jim — Glad we’re on the same page. A credit card is a fantastic tool for 1) record-keeping, 2) getting rewards, and 3) providing a payment method that’s more convenient than checks and cash and has more legal/fraud protection than a debit card.

I’m a huge fan of credit cards as long as they’re used as a debit-card substitute, i.e. you have enough money in your checking account to pay in full at the moment that you swipe. In fact, I have more than 200,000 frequent-flier miles thanks to my credit card. :-)

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Glenn Schworm May 8, 2013 at 2:05 pm

Hi Paula,

I must strongly and respectfully disagree. If you read any of my posts you will see that is NOT the norm for me at all. However I have a bit of personal experience here. We started our business on credit cards for the first 3 deals and now have flipped well over 100 houses in 4 /12 years. Had we not had that as an option to get started, hard to say if we ever would have. It is risky, but so is flipping houses in general. So is any high yield investment for that matter. Anything can happen as you said, but you can hedge your bets by doing the numbers up front and staying at the 70% rule. If you do that you will have a hard time losing money if you play your cards right, even with a huge bill to pay off. So while I can appreciate the opinion and the article, my experience is very different in regards to credit cards. We use private investors now who all receive double digit returns, and while not cheap, without them we would not build as fast as we do.

I am sure we will have to agree to disagree, and that is all good. We probably have very different life experiences we are pulling from. Have a great week!

On a personal note I love that you have traveled to 27 countries, my wife and I are avid travelers and the goal is to be able to retire to travel the world. :-)

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Brandon Foken May 8, 2013 at 6:38 pm

I was hoping you would chime in on this article, Glenn, after listening to the podcast with you and your wife. Always love a good counter point. While I’ve been looking at my first deal, I’ve come to the realization that at least some of my funds will need to come from my CCs. There was a great article on BP not too long ago talking about taking calculated risks. If you sit on the sidelines and are afraid to take (calculated) risks, you will never get in the game. Thanks for the article, Paula, and challenging my assumptions.

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Paula Pant May 9, 2013 at 10:08 am

Hi Glenn,
I love hearing from fellow world travelers! You and your wife have a fantastic goal. There’s very little that I enjoy more than spending long, leisurely chunks of time in various cities and countries across the globe. :-)

I anticipated that there would be some controversy around this post. I know that some people have advanced their real estate careers through CC’s, especially in the early days when its hard to find other forms of financing. Money tends to be riskier/pricier to acquire for novice investors.

That said, I’d never advise a friend or family member to try the CC route. I’d encourage them to look for partners, private financing, cash-out refi’s of their primary home, etc. But I respect your opinion and I’m glad that it worked out for you.

Congratulations on flipping more than 100 properties! That’s an impressive number. :-)

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lisa May 13, 2013 at 11:33 am

Just to chime in, Cash Out Refinancing, Private money, lending from family, may not be an option for some people, nor do they want to have that outside entity involved in their business. There are a lot of investors who feel that way, which is why having 14k worth of Line of Credit between Lowes/Home Depot with their free financing options IS the way they can successfully do their rehabs and have their investments pay it off.

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John Chapman May 8, 2013 at 3:45 pm

Paula, I think you’ve got some points but I respectfully think you might overstate your case. I think it’s very difficult to make a blanket statement that credit cards are generally bad or bad unless you have the money to pay them off instantly. There are a variety of credit card offers and nearly infinite personal situations. I’ve used these deals quite a bit over the past 6 years to very successfully grow my rental business. Yes, you have to be careful. Yes, you have to assess risk. Yes, they are probably not for many people. But they are a tool nonetheless and, properly managed, can grow your business. Again, you raise some great points. I just don’t agree with your overall conclusion.

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Dennis May 8, 2013 at 6:39 pm

Great advice. Now let’s have a show of hands, how many here have used a credit card to do a flip?

At one time I had near $40k on a credit card 5 months later I sold the place and paid the bill in full. From years of playing with credit cards and home equity lines of credit, today I have an 840 credit score. But in doing so all of my hair that should have turned grey instead fell out.

Using CC’s like cash is like playing a game of musical chairs, when the music stops you might be put out of the game.

When the RE bubble burst I had $10k on my Home Depot card, the house became a rental resting on a $70k line of credit interest only at 4% interest. To make due date on the HD card I was forced to sell four numismatic gold coins. I didn’t take a loss on the coins, but if i hadn’t sold them they would be worth double today.

I wholly agree unless you have reserves to pay credit cards off in a pinch, don’t play the CC game unless you have a chair strapped to your ass.

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Paula Pant May 9, 2013 at 10:08 am

@Dennis — “Don’t play the CC game unless you have a chair strapped to your ass.” — LOL! That’s the best sentence I’ve read all day. :-)

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Glenn Espinosa May 8, 2013 at 9:16 pm

Generally I agree with you but your view point, in my opinion, seems to be too much in the extreme.

Anything can happen during a flip but if you focus on those one off risks that you listed (earthquake, etc.) then you might as well argue that no one should ever flip a home.

I agree with the other Glenn on this only because our stories are very similar. On my first two flips we had at one point nearly $25k in credit cards, 0% APR using teaser rates. We fixed and sold both homes in way under 6 months and were able to pay back everything and make a nice profit. Nowadays we are using a combination of private lending packages but I would not be adverse to pulling out the CC’s again in special circumstances.

My question is – if you are taking calculated risks, then why not take advantage of the leverage? CC’s are just another tool in an investors toolbox. Don’t go trying to use it in every situation but sometimes it might be the easiest and best tool to get the job done.

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Paula Pant May 9, 2013 at 10:45 am

@Glenn — I wouldn’t say no one should ever flip. Risk isn’t one-size-fits-all. There are different degrees of risk. A CC, with its high interest rates, carries risk that’s much higher than a 2-year note or a 5-year note at a fixed low-interest rate.

Regardless, though, I’m glad that you were successful with it!

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Ali May 8, 2013 at 10:41 pm

My sista investa! Oh wait, even better, my Atlanta sista investa! :)

I also have to respectfully disagree (would be dumb not to since I wrote a blog on here saying why you should use credit cards to help buy investments), BUT, you do indirectly bring up a good point. I think credit cards are an excellent tool to help fund things, I’ve done it quite well in the past, but doing so is not for the financially-mediocre on the smarts scale. Purchasing things with a credit card for most people is a horrible move because they are usually buying things that only lose value, which exponentially increases how much the total cost ends up being, and they rarely have a payback plan should things go haywire. But, if you are buying appreciating things, assets, then there is room to maneuver here.

Ultimately, the trick to being a successful real estate investor comes down to one’s ability to find money. Unless you are blessed with a trust fund or fancy inheritance, to succeed in investing you have to be able to find money. Maybe from loans, investor partners, credit cards, starting your own business to earn the capital, who knows what. I agree that if you are new to flipping and not real up on how it all works, you probably should not risk a time limit to pay back a credit card before the 29% interest rate kicks in. However, if you are more experienced, a 0% interest 12 month time frame on a credit card could be gold. It doesn’t mean you won’t fail with that flip, but it is less likely. Then, if something does fail, your #1 goal should be finding new money to pay back that credit card. You’re an investor, figure it out, that’s what makes you an investor- finding money. Find it, and find it fast! If you have a pay a couple months of that 29% interest rate, no biggie.

So I do disagree with your overall point, but I do encourage everyone use caution and be smart about it. Besides, anyone trying to invest in CA where the earthquakes happen has way bigger worries than just earthquakes ;) Kidding. Well not really, but…

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lisa May 13, 2013 at 11:40 am

right on! Your article was the one that opened my ideas to a few new ideas I didnt have, and has helped me further along. Thank you for posting that article, it was one more tool to add to the repertoire of using CC for funding. But, the fact everyone says you should have good financial sense before doing it is a little silly, IMO. I honeslty feel that the people who go forward in real estate DO have that already. And if they didnt, if its not credit cards it would be something else that got them into trouble…We’ve all lost at one time or another.

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Jason May 9, 2013 at 1:46 pm

I think I’ll have to disagree with you on this one, but I’m wondering if the rules are different for flips vs. B&H. For literally ALL of my DIY rentals, I’ve taken advantage of zero-interest CC to purchase reno supplies and big-ticket items, but I’ve always done the math on how long it would take me to pay them off using the rental throw-off. I then have a “monthly minimum” payment in my mind to pay it off before the time limit, and usually, it’s about 6-8 months in.

The extra cash gives me a nice reserve and as the rents come in, I keep some throwoff and put some into the CC balance, which I try to keep under 10k.

A couple of times, I’ve eaten into my reserve a little bit. Worst-case, I’ll need to dig into my own pocket to pay my preset “minimums”, though I’ve never had to do that before.

I’m not seeing the risk here.

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ThosMN May 9, 2013 at 2:17 pm

I also disagree, but you have to use credit responsibly. I’ve used 0% and low teaser and LOB rates for years. I currently own about $5 million of RE, mostly rentals. I still owe about $250k on credit cards, from 0-9%. I’ve always treated it as working capital, a lot easier to get than bank loans! Though I also have about a dozen equity lines of credit now also that I use to fund deals that require quick cash. Then I refi my cash out, repay the equity line, and/or just add the property to my free-and-clear portfolio. Obviously, a property that won’t cash flow is not a good candidate for any kind of credit card (or any) loan.

A newby trick is to be…um…optimistic when applying for cards. “Current income?” Actual or projected? Of course my income will be $310k this year, I am very optimistic!” Credit card companies don’t typically verify income (and won’t ask for tax returns), esp. if you’re self-employed. And your stated income may drive them to give you a higher balance card. Credit scores, however, are not stated, and if yours are bad, forget it….

One hint: to keep my scores high (they’re low 800s now), I never borrow more than half of your available balance on any one card, and always repay at least min payment plus 20% every month. And I still churn cards, esp. Capital One cards, I get lots of offers from them. It’s cheap working capital!

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ThosMN May 9, 2013 at 2:19 pm

Oh, and about risk. If you can’t handle risk, put your money in a CD or other bank account. Well managed, risk is your FRIEND, and why this business creates so much wealth for so many people!

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Brian Burke May 9, 2013 at 10:42 pm

Paula, thanks for writing this article. It’s always good to stir up a hornet’s nest of debate because there are a lot of valid points of view that don’t often get brought out into the open.
I think your best point is that using credit cards introduces RISK. Sure, there is risk in everything we do, but using credit cards adds an additional layer of risk.

It’s probably not a surprise to anyone that I also have a differing viewpoint on the usage of credit cards, as I had talked about this in BP Podcast #3. You mentioned that it is much better to finance by getting partners, private lenders, etc to finance your deals, which is absolutely a great comment. However, obtaining the trust of those investors & lenders requires a track record (and is still risky by the way, because those willing to invest early in your career are probably friends/family and if you don’t pay them it’ll be more painful than not paying credit cards).

But here’s the rub: obtaining that track record is difficult. If you have little money and little experience, it’s tough to get a break. The only way to get a start in this business might be to finance the deal yourself, which might require the use of credit cards to get it done.

Just a personal example – when I flipped my first few properties I was young and inexperienced and had nothing to lose, really. No one would invest in me, so I used credit cards to fund those early deals. Starting virtually penniless, I’ve now bought over $150 million in real estate (NOT all with credit cards!!). If I didn’t use credit cards to plant this seed, I’d still be working for someone else.

As another example, I still use credit cards to this day. Primarily because I am flipping around 100 houses per year, and all of that staff running around buying materials would be a nightmare if they all were armed with checkbooks. Credit cards allow me to track expenses, set individual spending limits, order and cancel cards as staffing changes, and write one check instead of hundreds each month.

So, generally I agree that credit cards are risky and should be cautiously employed, but I think they also have their place. Y’all be careful out there!

Brian

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Paula Pant May 10, 2013 at 9:46 am

Brian –

I’m glad credit cards were able to give you the start that you needed. And congratulations on buying more than $150 million, an impressive feat! Your story is very inspiring.

Personally, I would encourage a beginner to find an alternative method-of-entry. Find a well-established mentor who will give you a chance — perhaps a 5 percent stake in exchange for some sweat equity. Or hustle with side jobs until you build $10,000, which you could do in 2-3 months if you’re diligent. There’s always an alternative, always another way.

I absolutely support your use of credit cards as a proxy for debit cards — i.e., you have the money in your checking account and you can pay in full at a moment’s notice, but you swipe a credit card (instead of writing a check) because it’s more secure and convenient. That’s 100 percent fine, in my opinion. I do the same thing.

My only beef is with holding a balance on a credit card — I have no problem with the inherent use of one.

Nonetheless, thanks for your well-thought-out comment … I think lots of real estate investors will benefit from reading the diversity of opinions on this issue. :-)

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Clay Huber May 10, 2013 at 12:38 pm

I have nothing to contribute other than stating that I’ve really enjoyed reading all the various viewpoints on this topic in the comment section. Nice to see it done in a very respectful way too.

Great stuff folks! (no matter what your viewpoint)

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Paula Pant May 13, 2013 at 3:55 pm

@Clay — I’m really proud of the BiggerPockets community for providing such well-thought-out and polite comments on this post! Finally, there’s a place on the Internet with civility!

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Karen Rittenhouse May 12, 2013 at 7:54 pm

Paula:
We’ve done a ton of successful investing with credit cards. Anytime we get a 12-18 month low interest offer, we jump on it.

We are extremely disciplined and we’ve always been able to pay off by the final due date, but it has meant a ton of extra investment cash for us. For one deal, we needed a quick $80,000. Three phone calls to credit card companies later and we had it at 3% interest for 18 months. 8 months later, we had made our profit and paid them all back.

I don’t recommend credit cards to everyone, but they can be amazing investment partners.

Thanks for your conversation provoking post!

:)

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Joe June 13, 2013 at 1:44 pm

People often look at precious metal coins as investments but sometimes they need to put on payment plans. I think in these cases a credit can be ok especially if the coin is a gift.

Thanks for the great information.

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Mike May 24, 2014 at 8:08 pm

Thank you for your post, I agree too that a credit card is a fantastic tool for providing a payment method that’s more convenient than checks and cash and has more legal/fraud protection than a debit card. I use credit cards as a debit-card substitute, and the frequent-flier miles are a welcome reward :)

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Martin ed June 11, 2014 at 10:44 pm

I mean of course, you cant use creditcard to invest, like me when I was 14yo and try to buy a Wlanrepeater with my parent’s Creditcard….yep it was a scam. but you have to be careful not go full afraid.

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Led Lampen July 4, 2014 at 1:36 pm

When I bought Led lanpem it was so bad. I’ll save this for an important purchase

Yaritza M.

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