Cash reserves or credit ???

Question

Hello, BP.

When you are going to refinance your property. I believe 1 of the requirements are "cash reserves" to cover 6 months to 12 months of funds to cover the mortgage. Instead of having cash, can a person use Credit Cards as reserves to qualify as a cash reserve requirement??

Tommy F. · Answer

@Isiah Ferguson In my experience the reserves had to be cash and/or cash equivalents, i.e. CD, stocks, bonds, mutual funds.  I used my 401k statement.  I didn’t have to liquidate, but simply demonstrated sufficient funds that if push came to shove I could liquidate, pay penalty and taxes, and still have plenty for mortgage reserves.  Credit card cash advances are just adding more debt to situation.

Nicholas Scatton · Answer

@Joe Splitrock good to know.

Theres always a way to charge a card i guess. just open a merchant account for your LLC and charge the card, withdraw the cash... lol

Bill F. · Answer

@Isiah Ferguson I use them to buy supplies at Home Depot and pay them off at the end of the month. Credit Cards primarily provide convenience combined with the ability to use someone else money for 30-60 days interest free. Secondary bonus is rewards points.

From a risk and cost of capital point of view credit cards don't have many advantages.

Bill F. · Answer

@Isiah Ferguson

When it comes to situations like this I'm always reminded about Warren Buffets two rules for investing:

1. Don't loose money

2. Don't forget Rule 2

The single best way to not lose money is to have some sort of cash reserves to cover unforeseen expenses. Murphy's Rule still applies to Real Estate investing. REI is a marathon not a sprint, so I'd rather go a bit slower in the beginning having enough reserves to see me through instead of rushing in, having an unexpected expense, and getting behind. If you get in a hole early you're much more likely to cut your losses and get out completely.

Thomas S. · Answer

Cash or cash equilivant such as HELOC.

If you operate your business through a HELOC with rent checks in and expense's out you should always have available cash and a built in record system as well through your monthly statements.

Nicholas Scatton · Answer

Another reason is you cant pay a mortgage, or property taxes with a credit card.

Account Closed · Answer

Credit can be extremely useful for major upgrades and repairs. If, unfortunately, you dont have enough liquid cash to conduct a large scale repair, I would recommend using credit.  You never want to rely on credit but it good to keep in your back pocket in case of emergencies.

Joe Splitrock · Answer

You can't do this directly, but there are bill pay services that will take credit card payments and issue a check. They charge a fee of around 3% to process the transaction. I am not advocating this, but it is an option if you are in a pinch.

Ola Dantis · Answer

@Isiah Ferguson Also, you might get lucky in those 6-12 months that you don't even need to utilize any capital to cover any unforeseen expenses. Though  I understand its best to be prepared.

Cash reserves or credit ???

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