is it ok to use line of credit / credit card to start

29 Replies

I wanted to know if its ok for me to start with a line of credit and/or a credit card. Line of credit interest rate is 9% of 50000. Credit card rate is 11% but 14 if cash advance, limit is 25000. I do now have a pretty well paying job and know I can pay them off but need to leverage and start NOW!!

ANY ADVICE WILL GREATLY HELP.

You need to find a deal that returns higher than your steep 9% borrowing rate. 

Better alternative is to qualify for conventional mortgages. Are you able to get conventional of FHA financing? 4-5% rate and 20% or 5% down for FHA.

run all numbers and make sure there is good return on money invested. leverage cuts bothways so be careful in your calculations.

Some look at using credit cards as risky, but I see them as a tool if you can be responsible and use them to your advantage.

What's your exit strategy on this property? You don't want to be trapped into changing credit card terms on a buy and hold.

Also keep in mind, if the plan was to use the line of credit to acquire property then refinance into more attractive terms, that credit balance will show on your credit report and effect your credit score...fico scores can swing fast based on the balances being carried. Check out the myfico forums if you want to see how people obsess over this stuff.

There are definitely some ways you can use some of the money from your credit cards to get a deal going but it will require some other creative financing techniques.

Absolutely, again it's like buying with nothing down AKA OPM other peoples money. Example....

Think of buying with no money down as 100% financing. In other words you're going to borrow all or most of the money needed to purchase the property.

Here's what I mean. You find a suitable property for let's say $100,000 the seller owes the bank $75,000 how to we purchase the property? You offer to take the property "subject to" the existing bank loan, and ask the seller to loan you some of his $25,000 equity by holding a note for $12,500 called a wrap or an AITD all inclusive trust deed.

Then you borrow another $12,500 using your credit card or from a third party who you would give a note secured by a second mortgage on the property as security for the down payment money.

Congratulations you just purchased a property for 100% financing or no money down.
I should mention here that most of you will have different reasons for needing the information found in these postings. Maybe you have good credit but no money. Or you have the money for a down payment but no credit.

The example used above is just one of the many ways the purchase could have been accomplished. However, by using other no money down or creative financing techniques such as a land contract, a lease option or equity sharing may be advantageous for you as a buyer or seller. We will explore all of these techniques in detail and more in subsequent postings.

But no mater what technique you're going to use you want to make sure it's a win win for the both of you, however the one with the better knowledge of creative financing will ultimately come out on top. So it's very important that you have an understanding of your creative financing options so that you as the buyer or seller and not the other party can use the correct or best way to structure the deal.
My lessons favors the buyer and will first point out their best approach and secondly the sellers approach. You as buyer or seller will have to determine the technique that works best for your situation. With that said let's get to it....Next time
If you need any help structuring any type of deal give me a shout
Bill

Ditto @Nick G. 's comments.

A home equity line of credit is a lot better than using credit cards. Generally better terms and interest rate.

If you do need to use credit cards, in my opinion, can be used when you have a short term (months) exit strategy, like fix and flips. The compound interest would be a killer.

Good luck.

Just make sure you can qualify for a mortgage if your buying and holding, and ask yourself if the deal went bad, could you make payments on those accounts without any cash coming in from real estate for a few months.

Nana, yes you can absolutely use lines of credit and credit cards. As others have said being "responsible" is key! As a new Investor a conventional loan on Investment property is out....the 2year tax returns cancels this strategy. Also, if you're a member of a credit union they have better rates. Good Luck

@Nana K.  

Why do you need to get started now? What's the rush? Are you willing to risk your financial stability by rushing into a real estate investment? What if you over extend yourself and your plans don't work out? You have a solid job and you're in the drivers seat, why bet the house?

I say, save your money, and then experiment with your own cash. Don't take a risk that you can't recover from. If you had 100 deals under your belt and you knew your market like the back of your hand, so be it, but even then I wouldn't suggest using your credit card.

Fear and Greed drive markets. Deals will always be available, the question is will you be driven by your emotions or will you be driven by sound business reasoning?

Depending on how long you need to pay this credit card off... another option people have discussed is the credit cards that offer you to deposit the balance transfer offer directly into their checking account. Currently I have a 10k limit on a citi card that allows me to do this with 0% for 18 months.

Originally posted by @Bill Jones :

Absolutely, again it's like buying with nothing down AKA OPM other peoples money. Example....

Think of buying with no money down as 100% financing. In other words you're going to borrow all or most of the money needed to purchase the property.

Here's what I mean. You find a suitable property for let's say $100,000 the seller owes the bank $75,000 how to we purchase the property? You offer to take the property "subject to" the existing bank loan, and ask the seller to loan you some of his $25,000 equity by holding a note for $12,500 called a wrap or an AITD all inclusive trust deed.

Then you borrow another $12,500 using your credit card or from a third party who you would give a note secured by a second mortgage on the property as security for the down payment money.

Congratulations you just purchased a property for 100% financing or no money down.
I should mention here that most of you will have different reasons for needing the information found in these postings. Maybe you have good credit but no money. Or you have the money for a down payment but no credit.

The example used above is just one of the many ways the purchase could have been accomplished. However, by using other no money down or creative financing techniques such as a land contract, a lease option or equity sharing may be advantageous for you as a buyer or seller. We will explore all of these techniques in detail and more in subsequent postings.

But no mater what technique you're going to use you want to make sure it's a win win for the both of you, however the one with the better knowledge of creative financing will ultimately come out on top. So it's very important that you have an understanding of your creative financing options so that you as the buyer or seller and not the other party can use the correct or best way to structure the deal.
My lessons favors the buyer and will first point out their best approach and secondly the sellers approach. You as buyer or seller will have to determine the technique that works best for your situation. With that said let's get to it....Next time
If you need any help structuring any type of deal give me a shout
Bill

 This is an amazing example! What would be the terms of the seller carry back? 

Be aware that if you use your credit cards up to anywhere near your maximum credit line then the credit card company may raise your rates. There's probably less chance of that in today's current credit loosening environment than there was a few years ago, but  it's good to know. Always try to leave a bit of "breathing room" on each card. Also, one of the things the credit bureaus use to determine a credit score is "credit utilization" -- and in their ideal world they want you to be using less than 50% of your available credit. So if you use all of it your credit score will drop, albeit temporarily. It's not always a big deal, but if your credit is on the edge of being acceptable for getting a mortgage and you'll need to get a mortgage to pay off the card then this would be something you'd need to consider before maxing out those cards.

Couldn't the large credit card balance issue be resolved by the mortgage lender specifying that the loan proceeds would be used to pay off the credit card balance?  They could even do it themselves by issuing your loan amount in part in the form of checks made payable to your credit card and account numbers.

stephen
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  Originally posted by @Nick G. :

Some look at using credit cards as risky, but I see them as a tool if you can be responsible and use them to your advantage.

What's your exit strategy on this property? You don't want to be trapped into changing credit card terms on a buy and hold.

Also keep in mind, if the plan was to use the line of credit to acquire property then refinance into more attractive terms, that credit balance will show on your credit report and effect your credit score...fico scores can swing fast based on the balances being carried. Check out the myfico forums if you want to see how people obsess over this stuff.

If the credit card at 11% was maxed - what would the monthly payment be?
If the credit line at 9% was maxed - what would the monthly payment be?

If you can afford to make both of those payments indefinitely on your present income and in your present situation - then I would say you have few worries in proceeding.  Because that would be the worst-case scenario - short or becoming injured or losing your job of course.

That being said;  how about if you leave yourself a 50% cushion?  In other words:  look for something that you can buy for half your credit line and then rehab-to-resell for half the credit limit on your credit card?  

When the place is done, if you can mortgage at favorable terms - then change to a B&H on that one and rent it.  If you can't happily mortgage - then sell the place, pay off your debts, and move on.

stephen
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 posted by @Nana K. :

I wanted to know if its ok for me to start with a line of credit and/or a credit card. Line of credit interest rate is 9% of 50000. Credit card rate is 11% but 14 if cash advance, limit is 25000. I do now have a pretty well paying job and know I can pay them off but need to leverage and start NOW!!

ANY ADVICE WILL GREATLY HELP.

Jose here's what I like to see on a sub2 and how to beat the "Due on sale clause" at least minimize the risk:

Terms? There are no rules...Always try for a "win win for both the buyer and seller... On Sub2's go for no less than 5years with at least a one year extension that way you can sell the property and move on

Is there anyway to get safely around the dreaded due on sale clause acceleration clause? While protecting the buyer and sellers interests? You Bet

Here it is in a Nutshell. (This is what I use in California)

The concept is to keep the fact that the property has been transferred private.

The sales transaction remains unrecorded i.e. the deed is not recorded or the contract of sale or the financing agreement.

The transaction is maintained in the records of a settlement /escrow management company

Enough documentation is recorded to protect the seller and buyer in the chain of title without making the fact that the property was transferred public record....If you want more on this PM me

Existing loans, taxes, insurance are paid by the buyer into a collection account, which in turn pays all the accounts required to service the property

Recording a deed or contract is not required in most states to make a valid transfer

Not disclosing the new sale to the underlying lender is not illegal in most states

Keeping the transfer from the lender is not a crime or against the law. The act of the transfer is a breach of contract and only cause for the loan to be accelerated

@Nana K.

I am in Canada; so I am talking Canadian bank(US branch; like Wells Fargo

I use credit card & Home line of credit all the time.

You need more than one card(5-6 will do). The credit limit needs to be high; min $50K credit to $110K.

Line of credit has to be over $250K.

Banks offer 0% or 1% promotional interest short term(6months to 1 year) credit card loans all the time(I have seem that in the past 15 years.). Whenever I see opportunity like that,I usually take it out for a short term investment & use another credit card promotional rate to pay that  this one ONE MONTH before end of promotional term.

The banks like to promote low interest short term use, in April(tax time), may - june (vacation time) Dec (X'mas time) & JAN ( after X'Mas)

If no other banks are offering the promotional term, I then use my home line of credit to cover the short fall (interest rate, prime +1%). I found it worked real well for me ,as I do not have to get conventional loan all the time. 

When the bank manager can offer me a real good term, I then usually lock up the mortgage.

Between the credit card & line of credit. I can have access to more funds than any banks willing to  lend me in a short time. You have to be able to keep track movement of all these funds, otherwise you will end up paying more interest than conventional loan.

I saved a lot of time & interest by using this strategy.

 @Bill Jones :

That is amazing information!  I am guessing you wouldn't suggest to the seller they contact their lender regarding transaction. 

Pm sent

No you don't want to tell the lender However I have in the past told the lender I'm the new owner and nothing was ever made of it ..of course I was able to pay off the loan if accelerated...Generally as long as the banks receive their money they are happy....

@Bill Jones  Thats what I have read. As long as they get their money, they turn the cheek. Would cost them more I assume to eliminate a performing loan that let it be.

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Originally posted by @Thai Foo :

Ditto @Nick G. 's comments.

A home equity line of credit is a lot better than using credit cards. Generally better terms and interest rate.

If you do need to use credit cards, in my opinion, can be used when you have a short term (months) exit strategy, like fix and flips. The compound interest would be a killer.

Good luck.

 The one thing that comes to mind for me here is that if your deal goes bad, worst case scenario home equity line of credit can lead to you losing your house.  I prefer unsecured line of credit if you can qualify.  Worst case scenario you'd still be able to keep your house at least.  Obviously the rate may be a little higher but still nothing close to a credit card or hard money.  This would be directed to the person getting started, as advanced investors would most likely be able to better evaluate the deal.  I personally am not an advanced investor, and I much prefer an unsecured line as opposed to using a home equity line, for now.

Let's say you used your credit card to buy a home or as a down payment and everything go south do you have a backup to repay the credit card company.


Joe Gore

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