Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
When I got home last night I opened the mail and, like most other nights, received several credit card applications. Here are two of them:
I have successfully used credit cards such as these in the past to buy real estate or to rehab properties. But I would like to hear from other BiggerPockets members their opinions on using credit cards such as these to buy and rehab real estate. Please refer to the application images above for the details of each card.
Shiloh Lundahl There's a difference between using credit cards because you HAVE to and using them because you want an interest-free loan. Keep in mind that the stories you'll read are generally skewed by "survivorship bias". Accordingly, you'll hear a lot more from people who used them successfully than the people where things went sideways and pushed them into bankruptcy. The latter probably aren't in the real estate and certainly won't be lamenting their failure publicly. Certainly not as much as those who have found success.
1) If you have a separate business, it's much easier to deduct the interest charged if you're unable to pay them off within the 0% period.
2) The rates are pretty high once you get passed that initial 0% period - hard money, personal loans at credit unions, heck even Lending Club, Prosper, and Discover personal loans can be cheaper.
Thanks for your input @Account Closed about this strategy and when I got home I opened up these 2 credit card applications which are perfect examples of finding 0% interest credit cards to use for rehabs or the balance transfer options to use as your portion of the down payment for a flip. One card offers 0% for 15 months and the other for 18 months.
Shiloh Lundahl There's a difference between using credit cards because you HAVE to and using them because you want an interest-free loan. Keep in mind that the stories you'll read are generally skewed by "survivorship bias". Accordingly, you'll hear a lot more from people who used them successfully than the people where things went sideways and pushed them into bankruptcy. The latter probably aren't in the real estate and certainly won't be lamenting their failure publicly. Certainly not as much as those who have found success.
Credit cards can be used effectively if in the hands of intelligent highly disciplined investors.
Problem is few investors needing to use credit cards are highly disciplined investors. Good financial tool for those that are, financial suicide for those that are not.
Thanks for your input @Account Closed I think it can be risky. One of the major things that investors do in my option is learn to manage risk well.
I think using credit cards can be a great way to get started if you don't have a lot of start up capital at first and you know how to manage accounts and track expenditures really well.
True, but the other thing you need to realize is utilized credit cards affects your credit score in a greater way than a personal loan does. Your credit score can drop quite a bit if you are utilizing more than 30% of your available credit on credit cards - it's scored differently with personal loans. Business accounts with personal guarantees don't show up on your credit report.
What that all translates to is even if it's a 0% short term loan, it can have an affect on the price of everything from your car insurance to your personal outstanding credit (if you have any).
Another thing to consider is credit card companies can (and will) drop your available credit instantly when things go south - I had this happen on a HELOC of all things back in the 2007/2008 time frame.
If this is a strategy you want to use, I would also recommend working through a monitoring agency such as creditsesame.com (they have a free portion that I use) to manage the risk. They can also suggest various credit cards where you are likely to get approved as opposed to getting denied (I remember about 25 years ago, I was in college and received a pre-approval letter like the one above from Discover - I sent in the application and was subsequently denied). Also keep in mind that credit inquiries affect 10% of your credit score and stay with you for a year.
@Chris Purcell Yes. Both are possible. Working with general contractors who accept credit card payments can be a great way to pay for rehabs. Our contractors pass their processing fee on to us when they accept our cards. For instance, if the rehab is $10,000 for the first draw and we use a card they will charge us $10,000 plus what ever their fee is which is usually 1.7%-2.7% or $170 to $270. Then we just include that in the rehab costs of the property. Then when we sell the property and get the proceeds in 4-6 months we can use that money again in the next project before the 0% offer expires.
Using cards to buy real estate is similar. You see the balance transfer option on the applications. This means that you can ask for a balance transfer check and you can write it to your self and deposit it into your account. Then you use that money along with a hard money lender to buy a property. When you use the balance transfer option you usually pay a 3% fee (as mentioned in the applications above). This means that if you get a credit card for S15,000 and you write yourself a check for $14,500 then your balance to pay off will be $14935. That's it. You won't have any other fees as long as you pay back the loan and make the monthly payments on time. Do keep in mind though that there will be monthly payments. So you may want to write the check to yourself for $14,500 and then only use $10,000 as part of your down payment so that you can use the other $4,500 for some of the carrying costs and hard money payments. When we have done this approach we have had to use 2-3 of the balance transfer checks at a time to manage a rehab project.
One thing you never want to do though is get a cash advance on a credit card. Those rates are like 25% or higher. Balance transfer checks are very different than cash advances in the eyes of a credit card company.
@Thomas S. Well said. Credit cards can be a great financial tool for those that are disciplined and financial suicide for those that are not. I couldn't agree more.
@Account Closed You are completely right. Using this approach does effect your credit score. It can drop it dramatically. My score went from 800 down to 650 in a 3 month period of time because we were using about $100,000 on credit cards with this approach. And getting hard pulls on your credit does have an impact on the score (although not a huge impact compared to other factors from what I am told). We paid all the cards back and it took about a month or two for my score to go back up to above 750.
So you would not want to use this strategy if you applying for a primary residence or a car loan because it will lower your score temporarily and that will negatively effect the rate you will get.
Thanks for the resource at creditsesame.com. I haven't ever used them but I will check them out.
@Andrew Johnson You make a good point that the posts may be biased towards people who have used this strategy effectively. Are there people who can comment about trying this strategy where it didn't work for you. Please give us the details so that we can learn from your experience so we can be careful not to make the same mistakes.
@Rashad K. Thanks for your response. One of the reasons that I posted this was because many people feel it is very risky to use this strategy to invest. I thought that there would be more people who would criticize this strategy rather than agree with it.
You say that you have successfully used credit cards to buy and rehab. Tell us about it.
Shiloh Lundahl Those "unsuccessful" people are like either bankrupt or more active on "negotiating credit card debt" forums than BiggerPockets. I'm not trying to be sarcastic or glib but someone who got credit cards because they didn't have money, had a flip go sideways, now have: $20K in debt + 17% interest + maybe some late fees to worry about. Maybe you'll get some "I heard about a guy" comments but I'd hope someone staring at hundreds of dollars just in interest each month is spending his time driving for Uber instead hanging out here! 😬
I agree with everyone here--it's a great tool, if you are disciplined and go in with an exit strategy. It is only beneficial IMO if you're doing it fast, ie: within a few months.. anything longer and you'll just be paying $$$$.
We use credit cards to do all the rehab, and IMO it was a easy way to access funding. We put everything on the credit cards, and then we get an equity loan and consolidate within a few months. It's not a long term strategy, but it's quick/easy access to money to do renovations.
@Linda S. Thanks for you comments about your experience. I agree that it is a good short term strategy but not a long term strategy. But it can help open doors for long terms strategies.
Everyone is so agreeable on this post. Where are all of the haters that commented on my post about some newbies being entitled?
I've used credit cards to purchase properties or use as a part of the down payment before, just be aware of how the cards affect your credit and financials because, using the cards can push your metrics to the point where your exit strategies may no longer be available.
One example would be, maxing out your credit cards and your scores on your cards now plummet 100-150 points (like you had mentioned), not only this you max out cards that had a min payment of 5% of the balance so your 100,000 balance shows up on your credit report as $5,000 per month. Most cards are 1-3% of the balance reflected as min payment on the credit bureaus but there are 5% min reporting cards that are out there.
This $5,000 min monthly gets factored into your monthly Debt to income or global debt coverage ratio (DTI or GDCR) when obtaining bank financing so this strategy using credit cards might cut off your refinance exit strategy and now you may be left with only selling the property or others.
Prudently planned you can get the best of both by using credit cards strategically while maintaining your credit/financial plans in order.
There are a lot of credit cards that are relatively low around 7-10% interest annually (.58 - .83%monthly) with available credit limits up to 50k each and unlimited cash advance allowed with no cash advance fee's. These are mostly from credit unions. Most cards limit the cash out portion to 20-30% of the available credit limit and they charge 3-5% fee's (AKA points on the cash advance) + very high interest rates of 14-28%. So picking the right cards can really help.
Personally I prefer the 7-10% cards with no limits than the 0% interest intro offer with 3-5pts or % upfront because Im not looking at rate. Im looking at volume of interest paid in total.
I remember back in 2003-2004 I was funding real estate activity through credit lines on my rentals, and as rates were steadily increasing on my credit lines I received all kinds of promotional credit card balance transfer 0% offers with no balance transfer fees for 12-18 months. So I took advantage of several of them to transfer over my credit line balances and it worked out very well. I took a short term hit on my credit score, but as I paid them off and did not close the card accounts, my score actually increased over time as my higher credit availability led to a much lower credit utilization rate. I still have many of those cards to this day and they mostly sit in a sock drawer.
I got spoiled during this period as the 0% promotional offers today have a 3-5% balance transfer fee. Only card I know of that still has a 0% promotional balance transfer offer with 0% transfer fee is the chase slate card. The offers from the original poster have 3% balance transfer fees.
If this strategy is going to be used, it is critical that the end of the promotion be calendared, and the balance paid off by the end of the promotional period. Read the fine print and understand it.
Why use your own money when someone else is offering it at 0%. To this day I still utilize 2 credit cards with high credit lines to fund deals. I have the money in the bank but why use my money when someone else is offering it for free. You never know when a deal may pop up and you quickly need to come up with solid cash to close in a couple days. Just be smart with credit cards unlike the majority of the population and you will reap the rewards.
@Albert Bui I really appreciate what you added here. It is really important to know that your credit score will go down during the use of a high percentage of your available balance on your cards. My wife and I used this strategy for flipping and it worked well. But when we tried it for buy and hold properties it did make it more difficult to get the financing. We had to wait until a few of our flips sold and pay off the cards to raise our score to get preferred rates on a loan we are getting right now.
So thank you for adding that to the discussion.
The 7-10% cards with no limits sound like a great option. I will look into those.
For most folks, I would say very bad idea. This is bigger pockets so most of the folks here are here because they are already more responsible than most when it comes to CC's. Notice I said most, not all :).
I would say it's a bad idea if you have no other alternative for the money. Then it becomes risky and I wouldn't do it.
If you have the money otherwise and want to take advantage of a 0% rate for 6 months or something like that, I say why not. It's just a strategy at that point. They key here is that you are aware of all the pitfalls, can have it paid off in time with no issue, and won't get stuck without being able to pay it back or potentially having to pay interest at a super high rate. Credit cards can be a great tool when used correctly. For me, I use my credit cards (I have 2) all the time. I pay them off in full every month and have never paid a cent of interest in my life. I've gotten tons of points along the way, taken free trips, etc. That's how you use credit cards. I would never put anything on a credit card you can't strike a check for right there and then.
@Rob K. Now that everyone knows that you keep your cards in your sock drawer you might want to move them so no one steals them... or your socks.
Joking aside, I do completely agree with you that you need to have things calendared so that you don't all of a sudden get to a point where the cards are coming due and all of your funds are tied up.
@Rocky V. well said. If I can use the bank's money for low interest rather than my own I will. There is a benefit for having my own money in the bank.
@Dhru Das here is an example of buying an property with a credit card. I got this in the mail the next day.
This is a balance transfer check that is connected to my credit card with 0% until 03/20 and a 2% fee. You can write these checks for up to 15k (if your limit is higher than that). With one or two of these, you can use them to pay the portion of the property that the hard money lender doesn't pay for. With these, in conjunction with hard money, you can buy a property with a credit card. All you have to do is deposit it into your account, wait until it clears, and then wire the funds to the title company when you buy the property.
@Razak Amadu Don’t use cash advances. Those are way high in interest. You can google 0% credit cards and apply for one of those. You can use it to pay for the rehab supplies. You can also google balance transfer credit cards. And rather than paying towards a credit card you can write the check to yourself and deposit it into your account and use that money. Be careful and don’t do too many. You don’t want it to negatively effect your credit score. And you need to make sure you can pay it off before the time runs out for the 0%.