What about buying a house on Credit Cards?????
Real Estate Investor · Cebu, Philippines · Member since 2008 · 297 posts · 5 votes
What about buying a house on Credit Cards?????
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Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
14yDon't forget that the credit cards will have a transaction fee, normally 3% to 5% of the balance you charge. Interest, if any, begins accruing immediately. And, you have to make a minimum monthly payment of between 2% and 5% of the outstanding balance.
If you don't have any cash, how will you make the monthly credit card payments? One late payment could increase your interest rate on the balance to something near 30%. Additionally, if you are late on just one card, the rest of the credit card issuers could raise your rates under something called "universal default" (late on one is late on all).
Too big a gamble, in my opinion, especially if the property you purchase does not generate income right away.
18 Replies
- 14yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
This is the worst idea I have ever heard!!!!
Curt Davis - KAIZEN Realty538 Reviews - Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
Not sure why you would say that, Curt. My credit card companies send me checks at least once a month offering some zero rate deal. Sometimes they include "purchase checks" you can write to yourself or anyone else and still have a zero or low interest rate. If you can borrow money from a credit card company for a low rate (meaning, anything less than the 15% a HML will charge), why not?
Well, there are some risks. One is that you charge up all your cards and hurt your credit score to the point where you can't qualify for the refi. Another is that the cards have some gotcha's on them that let the company raise the rates to punitive rates that would make a HML blush. A third is that you may have a tough time getting a LOC on an investment property. A fourth is that you might have a hard time even doing a cash out refi and end up stuck paying some horrible rate on the money on the cards.
- Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes14y
Don't forget that the credit cards will have a transaction fee, normally 3% to 5% of the balance you charge. Interest, if any, begins accruing immediately. And, you have to make a minimum monthly payment of between 2% and 5% of the outstanding balance.
If you don't have any cash, how will you make the monthly credit card payments? One late payment could increase your interest rate on the balance to something near 30%. Additionally, if you are late on just one card, the rest of the credit card issuers could raise your rates under something called "universal default" (late on one is late on all).
Too big a gamble, in my opinion, especially if the property you purchase does not generate income right away.
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
Its not the best outfit, but I know of a few people that have bought homes with credit cards, got a signed contract with a two week contingency after the closing to rehab the house using the proceeds from the sell.
- Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes14y
I'd rather have the credit cards as a safety net. Dave T. is correct about the upfront fees. Have you talked with any smaller regional banks about your plans? Perhaps you can get financed using a blanket loan encumbering all your properties. I had to do this years ago and as the equity increased, I was able to add more properties. Something else we did (but we were young and had no kids) was buy fixers/great deals with FHA or 95% financing, live there for a year, keep the house as a rental and move to the next one. We sold a few along the way to raise cash or 1031 into more properties. We ended up with about 10 properties by age 30.
At one point I got some unsecured lines because I had proof of a history of success. If you are highly levered or lack solid w-2 income, these ideas may not be an option. For a few years we had to target owner financing because we couldn't get a regular loan. Back then I hadn't even heard of HML.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
This has been beaten pretty hard but people should use more numbers.
Here's the biggest flaw... if you can find someone to give you a Home Equity loan on your rental (and they aren't easy to find), you'll likely only get between 60 and 75% LTV out of the property (assuming having tapped out credit cards hasn't lowered your score to the point of not qualifying).
Basically, what are you planning to do about the other 25 - 40% of the purchase price?
Having properties cash flow at 100% financing is great... but having 60% at say 6% interest and 40% at 15% interest will make cash flow very difficult. If you were getting a 25% down payment through borrowing against a 401k (4.5% interest) or equity on a car (less than 3% interest) you'd probably be okay though it would seriously impact your cash flow for the 5 years you'd pay those loans back due to very fast (comparatively) amortization.
On a $100k rental, $60k @ 6% for 20 years is $430 a month, $40k @ 15% for 10 years is $645. Assuming 2% rents and the 50% expenses guideline, you're negative $75 a month for your first 10 years.
- Real Estate Investor · Cebu, Philippines · Member since 2008 · 297 posts · 5 votes14y
Thanks for all of the reply's.. The reason that I brought this up is because a friend of mine did this very thing... He held the house on cards for six months and then got a HEL... Now this all took place about four years ago so things may be different now.. I havent looked into this at all. I wanted to post it here first before I started running it by my bank and before I called any CC company's.
- Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes14y
Hey Travis,
I recently bought a house cash and carried the rehab on consumer credit. I would be weary of carrying a balance that you couldn't pay off within two years, regardless of the performance of the property. Then if you can't refi, your stuck with less than optimal financing, but you're still free and clear after a couple years, or preferrably less.
Something Jon pointed out to me yesterday regarding refinancing is that a bank would rather refi on terms than do a cash out refinance. Using a HML rather than a CC will get terms established on your purchase and make it easier to refi. Using a CC rather than an HML will show that you own the house free and clear and banks will be more weary about financing. PLUS you now have all this unsecured debt working against you credit and your debt to income ratio. Nobody can tell you ahead of time if you will qualify for finacing after you have established your consumer debt, so it is very risky.
I think this stategy would actually be pretty awesome if you had the cash to cover the deal anyways. Then you could use 0 % apr for a year or whatever and then just pay it off. Or if you got "got" by the bank, you could pay it off and tell them to shove it - which always feels good! Otherwise, the risk of getting stuck with a super high interest rate is very high. Years ago I worked in a customer service call center for a major credit card company. That was back when 22.99% was the dreaded punitive rate. Trust me, there was no way of getting out of that rate and once people got hit with it, they would scream, yell, cry and beg, but there was no relief because now they had poor credit and were over a barrel. I can't imagine paying the rates they have now - 29.99 % !!!
In my opinion and experience, only the slickest of the slick fully maximize these introductory rates. That being said, I am using consumer credit and just consider it the cost of doing business until I can get something better lined up. But my CC rate is 12% with a credit union and without the "gotchas!" attached. An unsecured line of credit runs me about 14% and I have average credit.
- Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes14y
Travis, I think I would list CCs as "option G" on my list of sources of finance. I would have to be 100% certain that everything would work out including obtaining a HEL or refi into a long-term mortgage when appropriate.
There are a lot of pitfalls to the strategy as others have listed.
There are better options (options A thru F) that I would investigate first.
As Brian suggests, those CC punitive rates are really the death knell for the borrower.
My $0.02
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Everyone made great replies. I'll just add that those that do this would typically set aside some of the amount borrowed to make the minuimum payments on the CC's (in response to someone previously).
Also, if you can demonstrate that the CC debt was used to acquire the property, the interest should be tax deductible (Dave T can comment on this, I've never heard him say anything incorrect about taxes).
Obviously, it's a 180 degree different financial world than 4 years, ago, exponentially more difficult to get financing, particularly NOO HELOC's.
If you can hold for 6 mths to one year, however, you might well be able to use a new appraisal, picking up the appreciation you forced into the deal, in your refinancing and do this with little or no net funds invested when the dust settles.
So if the stars all align... jackpot. But lots of ugly scenarios. You should definitely have a bank lined up that will at least APPEAR willing to lend to you at the 6 mths to one year mark. Remember, they'll look at collateral value, debt coverage ratios, debt-to-income ratios, available liquid reserves (this one may kill you), and successful 2-year track record in real estate. Sometimes they won't give you credit for paying off a credit card balance with the loan proceeds (after all, you can just run it back up). So you should get pre-qualified with a bank before attempting this feat.
Besides, every guru "claims" they used credit cards in their wild-and-wooly early days to start their fortune-building!
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Sell one of your homes as a "turnkey" passive investment to busy high-tax bracket professionals in your area that could benefit from a high-yielding, tax-advantaged investment, and use the profits for a down pmt on another property. Flip one, keep one, a tried and true method, as long as you're adding good value through the acquisition/rehab process, which I'm sure you are.
- Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes14y
In another business, I had BLOC at 8% and CC offers at 0% with no payments for 1 year. In one example, I took out $15k on a zero card. It cost 3% for the cash advance fee. I paid it off in the 11th month cycle to ensure I did not get caught in any bank BS. I would not recommend this type of strategy unless you have cash to pay it off, have access to a BLOC as I did (my safety net), or have another card that you can tap to get you by a little longer. The other key is to get business cards that do not show on your consumer report. With that said however, I would never suggest anyone buy a house with credit cards. Floating operating expenses is one thing, but large capital purchases like RE need to be acquired using safer alternatives.
- Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes14y
I am not against this idea as the rest of you guys. It definitely isn't the best option. Early on I financed much of my expansion via credit cards, my credit score tanked, but I paid them all back.
You would be much better of using it for a flip (short-term cash generation).
If your existing budget (aka day job) can support the extra minimum payments that gives you a lot more safety. If you are planning to get loans your credit score will probably tank if that is a big % of your available balance.
Check out Prosper.com and LendingClub.com, they are probably cheaper solutions if you have decent credit. I got a loan from Prosper about 4 years ago.
- Realtor · Houston, TX · Member since 2011 · 916 posts · 296 votes14y
What if you used your credit cards to buy the house for someone you know and trust then they "sold" the house to you through seller financing? It would be a rate and term refi. Is that illegal, stupid, or both?
- Real Estate Investor · Cebu, Philippines · Member since 2008 · 297 posts · 5 votes14y
""Check out Prosper.com and LendingClub.com, they are probably cheaper solutions if you have decent credit. I got a loan from Prosper about 4 years ago. ""
My top score as of last week was 805 and my DTI only has my truck payment as a debt. So I am sitting pretty good. I am closing on the second house this Thursday but like I said I want to plan for house number three four and so forth... I could pay the house off that I am buying Thursday in four years and then use that to buy others but it would put me on hold for that amount of time..
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