Using credit cards to fund the purchase of rental properties

25 Replies

Is there anyone out there who has used credit cards to fund the purchase of a rental property? I am planning to use my cards as a tool to aquire property and then get a cash out refi as soon as possible to pay off those high interest cash advance/balance transfer fees. Then, rinse and repeat (aka the BRRRR strategy). If there is anyone who has done this successfully and would be willing to talk about the process, I would be very interested to talk!

I haven't, but I imagine if I had to, my first step would be to acquire credit cards that had a total limit that was double what I was taking out so that none of them are over 50% utilized.  I'd also look for cards that allow you to write checks directly to yourself (barclay cards for example.)  Also look for cards that have the longest terms for single fee 0% ongoing (or as close to it) balance transfers (most common is a 3% fee, some credit unions are 0% fee but higher interest, some barclays cards are 1-2%.)

Look at repayment terms - some cards make you pay back 1% per month (barclays cards), others up to 5% per month.  So, for a 50k balance, card A has a min payment due of 500/mo, card B would be 2500/mo, even though they have the same balance.  Look at how they calculate the min due - 2% of balance plus interest for example.

Your min payments are going to be wild for a while.  Like, probably a min of 1.5k per 100k, and that's assuming you can get a bunch of barclays cards, and could be closer to 3k or 4k per 100k, where as a mortgage would be $500/100k.

There are two ways to get the $ off cards that don't allow you to write checks to yourself.  One way is to find a card that does, write the check, then transfer the balance to the other card, then write the check from the first card again.  Problem is you'll get hit would double fees on the first card this way.  The second way is to transfer balance from a card that has no balance, you'll have a huge credit, and then in a month or so they will allow you to request a refund, and they will mail you a check.  This is a higher risk strategy and a good way to get a company to shut your card down nowadays.

Oh, and be careful, once you start loading up cards, the cards you haven't gotten to yet might reduce your limits to something like $1k.  Amex cards for example, if they see you incurring huge balances.  And some of your cards may drop your limit to just above what you owe once they see what you're doing, others may close your cards altogether.

And finally, when you go to refinance, now your credit score is lower because you have all this debt.  Make sure you'll still be able to refinance and not get stuck in a trap.  Having a spouse helps here, especially if one of you makes a lot more than the other - the one with the lower income can incur most of the debt, then put the house solely in the other spouses name when you buy it, and have them refinance when it comes time.  Though someone else will have to tell you the limit on a cash out investment property refinance.

Did you look at hard money loans? Is there a reason you can't get a mortgage?  If you have the credit and income to get enough cards and afford the min payments, it seems hard to believe you don' t have the credit and income to get a mortgage. I'd try to find as cheap as possible of a house if I was doing this.

@Robert Ferrell   Absolutely agree with what Stuart said, it's very risky and why not just get a mortgage?  If you buy with cards and can't refinance for any reason, then you're trapped.

@Stuart M. First off, thanks for responding. Tons of great info that I overlooked when thinking about using this strategy. 

The reason why I haven't really considered a traditional mortgage is because I plan on buying my first rental from a turnkey company. From what I've read, they can be purchased using traditional mortgages, but it makes the process much quicker and easier if you can come in with cash and then refi after the purchase/seasoning period. Also, on an investment property wouldn't they expect me to have 6 months worth of reserve just incase anything should happen? Because that is something I do not have. Although, I do have access to credit in excess of what I would need to use to aquire the property, should any emergency arise.

The houses this company offers generally sell in the 40-60k range, so my plan was to pull about 10-15k from my credit cards (whatever 20% of the purchase price would be) and fund the remainder with a hard money loan. Then, I would go for the cash out refi to pay back the cards and the hard money and secure a long term mortgage on the property. 

You mentioned that the debt-to-income may stifle my attempt to get the refi, this is something I was also worried about. I'm not sure how understanding a bank would be if I were to explain to them why my credit card debt was so high and that the cash out refi would be for the purpose of paying those balances off. Therefore they wouldn't have to worry about me trying to manage so many debt payments.

It would probably take a year or two for me to save 10-15k for the 20% down, that is another big reason why I was thinking about leveraging my credit cards to help aquire the property. I really don't want to have to wait that long to get into the game if there is an alternative (albeit more costly) way that I can take action and get started.

Let me know what you think.
 

Great discussion! I am also new to the real estate game, however, I would agree that using a Credit card would not be the best idea. On the other hand, the point of using "other people's money" is so you don't use your own. :) Factoring in the rent income and the other numbers, would you still have positive cash flow even in the worst situation. Is your plan solid and is there a plan B or cushion so that if your plan with the Refinance doesn't work completely go as intended you would still be okay.

I have bought entire house is on credit cards. It worked out fine for me. That being said I would not recommend it. If you have a large balance on a credit card banks are much less likely to loan you money. So unless you know you have a Private Lender that will loan enough to pay off the credit card in a short timeframe, or whenever you finish the project, it is incredibly risky.

This has terrible idea written all over it.... 
First, it's going to be hard to get a loan sub 50k... and if you do it'll be higher rates.

Second, HML is likely going to be double/triple the rates of a traditional rate. Unless you have a track record or relationship with the lender you're not going to get good rates.

Third, you mention TK and 40-60k houses. This is going to be in rough neighborhoods you're almost guaranteed to have vacancy/turn over. If you have to make down payment on a credit card I'm going to guess you don't have much money in reserves. Plus when you're paying double digit interest I highly doubt these properties will pencil out.

Lastly, you realize that cash out refi will only allow you to pull out up to 75-80% of purchase price or appraisal value. But if you go appraisal value you may have to wait up to a year for seasoning. Plus you have closing costs etc (which you've already paid once for the HML).

Don't do this.

@Matt K. At the moment, that is all it is, an idea. I actually never would have thought of using credit cards to fund real estate purchases if I didn't hear about other investors, and even Brandon Turner himself, using them for that purpose. For me though, and this specific strategy I am trying to do, I couldn't figure out how to make it work without being negative cash flow (at least, of course, up until the refi). That is why I wanted to take the idea to the forums and get feedback. Clearly, it seems my approach is misguided. But I am wondering how other investors use credit cards to purchase and make it work. If I could find an alternative route, I would be happy to take it. There is nothing specific about using a credit card that entices me. It is simply the only means I have at the moment to come up with 10-15k.

In regard to your response, I do have a few questions/comments though. When you said it is hard to get a loan sub 50k, did you mean like a regular 30 year fixed where you put 20% down and the bank carries the rest? Or did you mean for a cash out refi after a property has already been purchased?

Second, the turnkey company I plan on using is Clayton Morris's company Morris Invest. From what I've seen in all of his youtube videos/customer testimonials, the houses are in B and C neighborhoods and tend to have high occupancy. They are generally 3 bed 1 bath houses that rent for around $700 or so a month with projected expenses around 40% (he claims that is a conservative number but I generally like to use at least 50%).

From what I understand, his company sells fully renovated and rented properties to investors at a price that is profitable for them yet also has some built in equity for the investor. For example, his company is all in for 30k, investor buys the house for 40k and the appraised value is 50k. Therefore the investor would have that 10k spread. This is why the refi should allow you to get back all your cash (80% of 50k=40k) to pay off any loans you used to get the property. Although, you still would probably have to come out of pocket a little to cover any extra interest that the cash out didn't cover.

I just don't want to make excuses and say well I don't have 40k so I guess I'll never invest. I want to take action and I want to get started. It's all just coming down to figuring out how to finance. I don't want to make things purposeful hard for myself, but I am also willing to do something unconvential and perhaps more costly to get my foot in the door if need be.

@Eric M. Wohlwend Yes, that is something I am afraid of, having a bank pull my credit and see massive credit card debt. Even though the debt was incurred for a very specific purpose with a plan to pay it off quickly. I have two questions for you though. First, if buying entire houses using credit cards worked just fine for you, why would you not recommend that strategy? Second, if you had private money lenders at your disposal, why did you not utilize their money instead of the credit cards to begin with?

I know the strategy but it's always seemed very last resortish .. not saying it won't work but there are better options

MI talks about Fund and Grow that has to do with using business credit cards to be able to purchase real estate. They say that they can get u up to 250k 0% interest for a year. Of course for them to do this it cost 3000-3500$ and they handle everything and you will eventually receive CC in the mail with available credit on them to use them how ever you want. There is a 30 min YouTube video that explains most of it. I personally have not used it but did look into it some  

@Robert Ferrell ,

We do this, as it's a means of short term funding, and it can absolutely be done!    It only works if you have incredibly high limits and access to a lot of credit, and are willing to take a hit to your credit score.   I went from an 806 to a 573, and you have to be willing to put your name out there, and handle the swings, after we get the equity line and everything cleared I'll be back to 700's in no time.    After you fund all the costs/renovations, go to a bank and get an equity loan, clear the cards.. repeat!   We're on our 6th house now in 1.5 yr, think we could do that with a traditional bank?  not with all the paperwork...  Will you pay more than banks-- likely... will it be significantly easier and faster-- absolutely.   

This strategy only works for those who are incredibly disciplined and understand the exit strategy.     PM me if you want to chat more about it!

@Robert Ferrell

I've done that as well a few times. And I absolutely agree with @Linda D. You should be ready for a big drop in your credit score and make sure that after you will be able to get some type of bank refinance. You have to have great discipline and make sure that you are not getting behind the schedule with your credit cards. Also there are crds that will give you 0% interest for 18-24 months. I would use those and would make sure to not use over 30-35% of the limits on a single card. That will allow you to get another card with high balance in the future to transfer balance if you can not refinance your purchase with the bank. 

For me that was cheaper way of paying downpayments or even financing some deals. However, if you are not sure you can stay on top and cover credit cards payments without refinancing, I'd stay away. If you have your primary residence try to use HELOC instead.

I agree with @Linda D. I have used this approach a few times, but it does negatively effect credit in the short term a lot like a 200 point drop, and you need enough credit available on your cards or revolving lines available to you in order to do this.  I'm talking about 100k plus if you don't want it to effect your score to the point where it makes it difficult to get refinanced. 

Do you already have a relationship with a bank that will qualify you for a loan. You may want to get that first.

For those that have done this.... Are you buying turn key houses that have already been rehabbed or you doing the rehabs yourself?

I think the big difference here is he's using the credit cards as his down payment for a turn key house and then wants to do a cash out refi. All the fees for the cash out and credit cards going to eat up his projected equity if he even gets that. He's looking at 40-60k houses that have already been rehabbed ...

Thank you @Matt K. for reiterating my intention. After reading @Linda D. and @Yuriy Skripnichenko responses, I was wondering the same thing: were they doing all their own work or were any of those deals turn key like I am looking into. Either way, I'm thankful for the advice and glad to hear that it can be done. Now the only question to answer is should it be done in my situation.

Linda, like you mentioned, this is definitely intended to be a short term financing option for me. I don't have incredibly high limits, all balances tallied equal to $16500. But, all I am looking to pul from my cards is around 10-15k to use as a 20-25% downpayment, then use hard money to fund the rest. My credit score is around 750, and although I've taken pride in getting it to where it is now, merely 630 a year ago, I am not all that detered by a momentary dip due to loading some major debt onto them for a short time. After doing this though, I am worried a bank may not approve a cash out refi. Plus, to be honest, until posing this question in the forums, I didn't even realize there would be upfront costs when getting a cash out refi. I am still very new to understanding creative finance.

Yuriy, I am thinking that will be one of my next moves, namely speaking with banks to find out what my eligibility for refinance would like if I had X amount of credit card debt, even though the debt was used strategically for asset purchase rather than frivolously for random purchases. This entire idea crumbles if that refi cant be secured. Because like I said, this is a short term financing option only and I do not want to be stuck with those balances sitting on my cards.

I would very much rather utilize the funds of a private lender and then do the cashout refi with a bank, but A.) I have no track record, and B.) so far as I know, there aren't any high net worth people in my network willing to hand over 50k to help a newbie get started. I'm not saying these things for pity, I am just trying to be realistic. That is a main reason why I wanted to try using my credit cards and hard money to atleast get one property under my belt by myself so that when I find a private lender, they would have more of a reason to trust that I have a proven strategy.

If anyone has any other financing options that work well with turnkeys that you would suggest I look into besides credit cards, I am all ears. Like I've said before, I don't want to make this risky and hard on myself if I dont have to. But, I am also willing to do so if there is no other option.

you're trying to combine two strategies... If you were going to do the rehab yourself then you would by the house and or rehab with the cards (like cash). Then you'd do delayed financing and get your money back out. If you did HML for say house, but did repairs on CC same thing.

But you can't do a cash out refi on on TK you won't have anywhere close to enough equity. If you're going to have a loan below 50k it's going to be tough to find a bank to finance that. You could get a HML to do it, but you're probably going to pay like 10 pts and 10% interest. You CAN'T do a cash out refi, because again, you have no equity in the house (above the 20% you've put down).

If you do find a bank to do this small of loan they'll ask where you're getting the down payment money from. I don't know exactly what they'll tell you when you say credit card, but it'll probably be something along the lines of no. You "can't" even use a HELOC (similar to a CC) for a downpayment technically. Now the way around this is to let the funds season in your acct for 2 months. However if you did this with the CC you'd have probably fees of about 5% for whatever you pulled out cash. Also, your cards are now maxed out... it's likely you don't have the income to offset this and it'll raise your DTI to a point where you won't qualify for the loan. Lastly, unless it's a new card or a promo you're paying interest on cash advance day one like as soon as you pull it out. Plus you'd have to check your cards, they might not let you cash out that much (even though your credit limit is that high).

I think you're confusing buying a house, fixing it up (increasing ARV) with HML/credit cards) and then using the cash out REFI to get your money out. This isn't what you're doing, that's why what you're trying to do won't work.

Seed Capital is a company that specializes in getting as much cash out of ccs as possible for as long as possible on 0% interest (generally 18-24 months). We've used them and I have been the debt bearer with my husband having the solid credit. It was a little painful watching my stellar credit radically and quickly drop, and you must be extremely diligent about paying the minimums for the time frame. That being said Seed Capital is 3-6k for one year of them guiding you and helping you turn that credit into business credit, and even if you have no money they'll charge you their fee on one of the new credit cards they get you. 

However, I don't recommend this for you unless you intend on doing a BRRR and you have a large credit line to begin with so your overall credit load doesn't exceed 50%. You don't want a ton of inquiries at once either and that'll happen if you're opening several cards. If you had a solid plan in place (meaning speaking to a banker first to feel good about a refi) then you could get the longest 0% card you can find that you can get cash advances on. Citibank has a 21 month no interest card with no rewards so it's fairly easy to open, and you could call after receiving the card and say you have a large purchase coming up so they consider increasing your line. 10-15k isn't too large of a need in my opinion (was that how much you need?), so then it's only one card you'd have to manage and it wouldn't burden your credit report with a ton of inquiries. I'd also Airbnb my place, sell some stuff on ebay, and do every odd job possible in my free time so that I'd need less money off that card to begin with. Consider every worst case scenario. What would you do if that 21 months time frame was up and all you did was pay minimums so you still carry a balance and can't get a loan?

I want to know what kind of property is going to make sense with numbers like this?

Let's forget the fact you're going to have fees outside of the monthly payment....

60k, 20% down @ 10% (since we said HML), 30 yrs (I don't think HML will even do that but whatever) 1.9% prop tax 800/yr insurance. You're looking at 584/mo. Now let's just say you somehow got 12k on the credit card free and for 2 yrs (not realistic but whatever) that's also 500 mo. So now just in payments alone for the first 2 years you're at 1184.

You're not even accounting for prop management (100% first mo rent, 10% ea mo after), vacancy, reapirs/cap ex. 

Let's just pretend that you somehow magically (you won't) get 1200 mo for this.... and nothing went wrong the first/second year (and that they took 100% for lease renewal on yr 2).

1200-10%=1080x22 (-2 mo for PM) $23,760. (15,840 for 2 yrs if you use 800).

Payments 1,184 x 24 (you're still paying all mo) $28,416. 

Congrats, you've lost almost 5k or about 13k if you use a more realistic rent, without even accounting for the fees you're going to pay to access this money. This also assumes nothing breaks, people pay, and you have someone paying 1200. You're probably going to get 6-800 and you're probably going to have issues come up, do you have the money to fix it and keep making payments?

:crickets: lol

Originally posted by @Robert Ferrell :

@Stuart M. First off, thanks for responding. Tons of great info that I overlooked when thinking about using this strategy. 

The reason why I haven't really considered a traditional mortgage is because I plan on buying my first rental from a turnkey company. From what I've read, they can be purchased using traditional mortgages, but it makes the process much quicker and easier if you can come in with cash and then refi after the purchase/seasoning period. Also, on an investment property wouldn't they expect me to have 6 months worth of reserve just incase anything should happen? Because that is something I do not have. Although, I do have access to credit in excess of what I would need to use to aquire the property, should any emergency arise.

The houses this company offers generally sell in the 40-60k range, so my plan was to pull about 10-15k from my credit cards (whatever 20% of the purchase price would be) and fund the remainder with a hard money loan. Then, I would go for the cash out refi to pay back the cards and the hard money and secure a long term mortgage on the property. 

You mentioned that the debt-to-income may stifle my attempt to get the refi, this is something I was also worried about. I'm not sure how understanding a bank would be if I were to explain to them why my credit card debt was so high and that the cash out refi would be for the purpose of paying those balances off. Therefore they wouldn't have to worry about me trying to manage so many debt payments.

It would probably take a year or two for me to save 10-15k for the 20% down, that is another big reason why I was thinking about leveraging my credit cards to help aquire the property. I really don't want to have to wait that long to get into the game if there is an alternative (albeit more costly) way that I can take action and get started.

Let me know what you think.
 

 Easy just dont use more than 30-50% of your credit card or as low as possible so your fico scores stay stable. It will depend on what your fico's are at, if you have 815 fico you can spare more and maybe can go up to 50% and still maintain atleast 740-750 fico score but if you're barely at 700 fico you would want to keep your credit cards at 0-10% or less to keep that score stable or higher.

The above has all to do with "credit utilization," and how your credit mix ( balance of revolving, installment, and other mortgage accounts/etc). The advice for credit strategy would vary from person to person as "maxing," out credit cards affects each individual differently but in general maxing out a card can lower your score around 85-100 points on the first go at it. However, with an extended history of maxing out and paying it off the credit scoring models start to learn your responsible use of credit and the credit reduction upon maxing it out reduces to as low as 45-70 points I've seen.

So what to make of all of this? Get business credit built and business credit cards so they will not report to your personal credit report. This will allow you to not have such a emotional roller coaster when it comes to qualifying with financing.

As for your Debt to Income you will need to be around 45-50% max (upper of 50% if you have lots of cash reserves).

If you have the property bringing in 900 per month that you just bought for 60k then a lender assuming they dont have too many overlays will allow you to use 75% of this rent or 675 to offset your monthly PITIA or principal/interest/tax/insurance/assessments.

Your PITIA  on 60k depending on which state you have this house should be around 400 per month so you'd be positive 275 income per month (675 - 400 = 275).

So it actually helps you qualify for more since 45% DTI of this additional 275 income you've gained is $123.75. What this means is that this rental property helped increase your buying power by $123.75 in more qualification per month (payment wise) which is roughly $24,000 in additional purchasing power when it comes to how much additional loan amount you can obtain.

@Robert Ferrell @Matt K. Is dead on right. This is a poor idea. First off 20% of $60,000 is 12,000. That leaves a loan of $48,000. Banks don't make any money on that small of a loan. I'm not sayin they won't do it but it's gonna be tough. Second a c or b class house generally rents for 1-2% of its value. ( I've never seen a house with a $60,000 ARV in a higher class area). $60,000 houses are generally in war zones. If a $60,000 (ARV) house in a C or b area actually existed the place would rent for around $600 to $700 dollars a month. In order to pay off your cards and the house loan and still have the$20,000 of equity in order to qualify for the loan you would need the house to appraise at $75,000. The loan would then cover both the cards and purchase loan. At 4.5% for 30 years that payment ( on $60,000) is $304 of your $600 a month rent. Now add in a PM, taxes, vacancy, insurance repairs and cap ex. Not much cash flow left. Also if you buy a fully rehabbed house for $60,000 how long before it appreciates 8% to the required $75,000?? This is a really bad idea me thinks. Besides the risks of financing this way it's rate to find a house that will cash flow when it's financed at 100%. Especially from a turnkey operator. RR

This will be a disaster. If anything goes wrong with a refinance you will be stuck. Plus you do not have cash reserves for repairs or other problems that could come up with the property prior to the refinance. Wait to buy until you have more cash in the bank. Perhaps you can cut back one your expenses with a strict budget and/or pick up a second job or overtime at your current job to save up money faster. If you do this and anything goes wrong you will be out of real estate for years trying to recover. It is not worth the risk.

I think it's helpful to view CC's as a tool to get the job done...a very sharp dangerous one! The beauty of CC's is that they're fast and no questions are asked - ideal for an ambitious beginner seeking to cut their teeth. Also, much of the discussion is limited to personal CC's and not business cards, many of which do not report on your personal credit (unless you miss a payment). The concept sounds great until something goes wrong - then you're screwed!!  How about this - think about employing a strategy using CC leveraging ONLY if you have the liquidable cash at hand to bale yourself out if something goes wrong. It takes time to save that puke of cash but once you have it you can feel more confident about leveraging CC's. Not having a proper realistic exit plan is equivalent to giving your future self the middle finger!

Correction : I see the business credit aspect has already been mentioned. Thanks Albert!

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