All Forum Posts by: Nick Coons

Quote from @Sergey A. Petrov:

Never heard of a lender using your available credit cards to qualify you for financing / borrowing more money…and even if one existed, would their rate really be lower than your typical traditional financing? If I were that lender, I’d look at you as super high risk and double my rate

So if I gave you a solid recourse way to get your money back if I didn't pay you, you would somehow consider that a high risk?

Quote from @Linda S.:

@Nick Coons,

As someone who has done credit  cards many times over to finance real estate, let me just say-- your plan won't work.   Do you think banks (especially now, hitting  a recession) will want to take ANY risk to help you fund stuff? Absolutely NOT.   At any time, your $10K limit could drop to $5K,  without notice-- it's all within their rights, and you think a bank will be okay being on the hook? Nope... sorry, but absolutely not.  I say this as a I had a card for $36K drop to $21K when the pandemic hit, no reason, they just started expecting defaults.

That being said, if you want to use your credit card-- do a BALANCE TRANSFER and write yourself a check for $10K, it's normally a 3-5% fee, and then 0% interest for the first year.  Banks don't want anything to do with your creative financing, but credit card companies--- if you play by their rules (always pay on time,  pay at least min) will, they don't care if you're buying a house or a new TV.

Yes, of course banks take risks.. that's their business. Banks that don't take risks cease to exist. Issuing any loan involves a risk.

It doesn't matter if the credit limit is dropped, say, from $10k to $5k. Once the auth is in place for $10k, the lender can still capture that amount regardless of any subsequent changes to the account, including a credit line decrease, so long as the auth is still active. They need only capture the authorization.

Quote from @William Joel Idleman:

I get what you're saying.  It's creative for sure.  I don't really understand how the credit card company would go along with it.  They aren't making money.  I can't speak for Chris, but my understanding is that a loan is considered unsecured if it's not backed by a physical asset.  So, the secondary lender by definition would still consider the loan unsecured because the credit card is not considered an asset.  It's considered a liability.  Then again, maybe I'm way off and you'll be super successful and one day write a book about it.  Best of luck!

You're right about the credit card company might not wanting to go along with it. I did consider that after posting my initial post. I could see a couple of scenarios.

- They would see pending authorizations appear and eventually fall off, and they wouldn't care. It wouldn't be any different than if I simply didn't use the card.

- They might have a policy in their merchant agreement (Visa and Mastercard have many of these, including preventing a merchant from processing their own card in order to avoid cash advance fees) that prevents an excessive number of authorizations without captures. I haven't gotten into the details of a merchant agreement in a long time to know if this is a problem.

I don't believe a credit card, on its face, is neither an asset nor a liability. A balance on a credit card is a liability.

I'm actually not sure what readers in these forums know about credit card processing terminology, so I may be assuming too much. Let me break this down just in case.

When a card is charged, it can go a number of ways. If it's point-of-sale, it's an "auth+capture", which basically means the charge amount is authorized (decreasing the available limit), and then the amount is actually charged to the card (increasing the cards balance). Another option is "auth", which happens when a hold is placed on a card. Think about checking into a hotel where they put a $200 "hold" on your card. You see this as a "pending" charge on your card. As long as the hotel never follows through with the "capture" part of the transaction, the pending charge is either explicitly released by the hotel, or it eventually expires. While it's there, it does the following:

- It reduces your available spend by $200, thereby making sure that that $200 is available to the hotel at will.

- It allows the hotel to initiate a "capture" at any time (until the "auth" is released), even if your credit balance is reduced, or the account is closed.. you as the card holder will still be liable because you authorized it while the account was open and usable.

So if I want to borrow $10,000, a lender can place an "auth" on my card for $10,000. This guarantees their repayment. If I repay the loan, they just let the auth expire. If I don't, they press a button and capture it, and the next day they have $10,000 cash and I have a $10,000 balance to deal with on my credit card. This is an order of magnitude simpler than a bank foreclosing on a mortgage. The risk appears very low given the guarantee (the presence of the auth), so I would think the interest rate could be fairly low as well.

Quote from @Chris Seveney:

@Nick Coons

I understand what you are trying to do but again - it’s not a secured loan and I don’t see any lender ever agreeing to this

1. If a lender gives you money they will make you sign a note and mortgage and secure it to the property

2. With a credit card you can dispute it and if you file bankruptcy the charge could be wiped.

3. the lender will want to secure their lien position as well (see #1)- whose to say this isn’t getting done on multiple credit cards

4. I don’t know if any lender that accepts credit card payments.

What it appears you are trying to do is use a credit card as a home equity line of credit.

I suspect you don't understand what I'm saying based on your response.. so I'll try again, addressing each of your points.

1) What property? I'm not talking about getting a loan against a property. I'm talking about getting a cash loan.

2) That's an issue for the bank issuing the card to deal with, not an issue with the lender in my scenario (they wouldn't care after the amount has been captured).

3) There's no problem if this is done on multiple cards. The lender is secured because they have a pending authorization on one of my cards, which they can capture at will.

4) My scenario doesn't require it, because I'm not suggesting making any payments by credit card.

No, that's not what I'm trying to do.

@William Joel Idleman

Then like Chris, you also misunderstood what I described. Since I'm now 0 for 2, I'll take the blame for not explaining it well. Let me try again.

Scenario: I have a credit card with a $10,000 limit. I go to a lender (not the provider of the credit card) and I ask for a $10,000 loan. In order to secure the loan, the lender places an authorization hold for $10,000 on my credit card. They don't actually submit this as a capture, so it doesn't increase my balance on my card at all, thus I have no credit card interest to pay and no credit card payments to make. It simply makes my credit card unusable to me because all of the available spending is tied up in a pending authorization.

Depending on the lender's merchant settings for their credit card processing account, they can leave this hold in place for up to 30 days. If the loan that I have is for a longer-term, safe for one year, then they can expire the authorization and immediately placement new one for another 30 days. They can continue doing this until I paid the loan in full. If I ever default, all they have to do is capture the authorization and they're paid. This means that from THEIR perspective, the loan is secured because they have immediate cash recourse to get repaid if I default. Now the issue that I have at this point is that I owe money on a credit card, but that only happens if I default with the lender. If I don't default, and I make my payments as promised to the lender, I never incur a balance on my credit card, and I never have to pay credit card interest rates.

Does that make more sense?

@Chris Seveney

I'm not sure if you understood what I described since your reply doesn't address what I actually said. Or perhaps I didn't explain very clearly.

I'm always trying to think of new and creative financing options. One has just occurred to me, and I'm curious if anyone is doing it.

Using credit cards for financing can be expensive, even when going through a service like Plastiq where you pay purchase rates rather than cash advance rates.

But what if you were to use a credit card to secure another loan? A lender gives you cash for a certain amount, and places an authorization on your credit card for that amount to secure the loan. The authorization can last up to 30 days depending on the merchant settings, where they can then cancel the authorization and renew it, and repeat the process for the term of the loan. If the loan is ever unpaid, the lender can settle the authorization and just receive the money from your credit card, at which point you're now paying normal credit card purchase rates, but the lender is now satisfied since they have their money. This would allow them to lend to you at a fairly low rate because from their perspective this is a relatively secure loan.

There are a couple of risks for the lender. For instance, the bank may decide to close the account or reduce the credit limit, or the credit card holder may close the credit card account. So this would need to be taken into account.

Is anyone doing anything like this?

Quote from @Jori Anderson:

Nick, I'm curious, how much do you pay for properties typically and you like to pay cash leaving no mortgage?

To give you a real-world example, I closed on a SFH purchase two weeks ago for $230k with an estimated ARV of $375k. I've budgeted $51,100 for rehab over three months, and I used a hard money loan to acquire it.

Quote from @Bonnie Griffin Kaake:

@Nick Coons As I understand it from working with investors is that it is becoming more difficult to profit from fix & flips for many reasons. Probably first, is that in today's RE environment it is difficult to find properties where the numbers work out. And, as you said, you are paying ordinary income rates on the short-term gain. 

If you buy, fix, and hold a property for at least 2-3 years, you can take advantage of cost segregation and maybe even partial asset disposition. In addition, you can choose to do a 1031 exchange into another larger property and avoid even the capital gains as you roll one property into the next. Cost Segregation gets you about 6-10% of your purchase price (minus land) back in after-tax cash flow, upfront with bonus depreciation that is available at the time of purchase. Right now, that bonus depreciation is 100%. It will drop by 20% per year starting in 2023. It is about the time value of money and as is commonly said in the RE profession, "The time to buy is always 'NOW'" 

All true!

However, my reason for doing flips is to raise cash to be able to buy rentals. I have enough cash right now to put into one property. If I buy a rental, then I'll have one rental, and it'll take quite some time to save up enough cash to buy another rental.

If I do a flip, then I have enough cash to buy another flip and a rental. The sale of the second flip allows me to buy a second rental and a third flip, and so on. So I can acquire more properties much faster than trying to save a down payment from an ordinary income source.

I just want to make sure I reduce my tax burden during each flip.

Quote from @Conner Olsen:

Use profits from flipping to buy 1 rental property per year and do a cost segregation study on it.

Can I use the passive losses on a rental property to deduct against the active income of a flip though? I didn't think I could do that unless I reached "real estate professional" status.