Creative financing can be an effective way to acquire quick cash so you can get investing in real estate quickly. One way that you can technically get cash for a down payment quickly is by using credit cards to buy real estate.
However you’re told to use credit cards with caution, and only spend what you can pay off during the billing cycle. So it’s no surprise that using credit cards to buy real estate can be controversial.
This post will discuss using credit cards to get into your first rental property, and whether this form of creative financing is the best choice for you.
Using Credit Cards to Buy Real Estate: Summary
- There are benefits and risks involving using credit cards to buy real estate.
- The main benefit is that you immediately have the money for the down payment at hand.
- The risks associated with using credit cards to buy real estate can be extremely costly and financially detrimental.
- Mitigate the risks of high payments, canceled cards, and low credit scores by educating yourself.
- Cash advance fees can occur when using credit cards; these can cost you additional thousands.
Pros of Using Credit Cards to Buy Real Estate
First off, you are assuming a no-money-down situation, meaning you don’t have a big down payment to start with. You’re probably not going to be able to pay off the purchase immediately, because you most likely don’t have the cash on hand, to begin with.
By using a credit card, you will get your 100% financing. Since you’re using the money from your credit card as your down payment, you’ll be able to achieve that financing. It can also be a relatively quicker process than being approved for a loan.
Remember that you can’t use that money to get a regular traditional loan, because banks are going to review and notice where you’re getting funds from. This will mean going into loans with slightly higher interest rates, where they won’t look at the source of funds.
With traditional loans, banks will analyze where your money is coming from, if it’s been sitting in your account for a certain period of time, etc.
Assuming that you’re not getting a traditional loan, the main pro of using credit cards to buy real estate is that you immediately have the money for the down payment at hand, and you can start getting into your first rental property!
Cons of Using Credit Cards to Buy Real Estate
The amount of risk with using credit cards is very high. It will entail very high payments, alongside the higher interest rate payments of the mortgage, and a higher credit card balance. You could be placing yourself on the brink of debt if you’re not carefully planning and preparing for the payments.
If you want to learn more about how to take full advantage of credit cards, check out our Credit Cards 101 guide.
Making payments on a credit card are vastly different than mortgage payments. Mortgage payments are ordinary annuities, amortized payments over fifteen or thirty years. Credit card payments do not follow the structure of a mortgage.
- Ordinary annuity: a set of equal, fixed, payments over a finite period of time.
If you take out $40,000 on a credit card, your payments are going to end up being $1,000 or more a month. Those are extremely high payments and if your rental property income isn’t high enough to offset these payments, it’s extremely counterintuitive and not financially advantageous.
Think about it: You’re paying 26% on the credit card payments, and you’re paying off your mortgage payments. This doesn’t even factor in repair costs, taxes, insurance, and other extraneous fees that are incurred.
Canceled Credit Card
If you’re maxing out your credit limits on one or all of your cards, you run the risk of having your credit card company cancel your credit card because of how high the utilization is.
Having high leverage can be a large warning sign for credit card issuers, as it means you’re borrowing above your means.
If you have a canceled credit card, you’re going to have to owe them the money back immediately. If you don’t have that down payment on hand immediately for the rental property, you most likely won’t have it immediately for your credit card company.
Damaged Credit Score
If your utilization is close to 1, and you’re nearing or at your credit limit, your credit score can take a major hit. Remember that you’re outstanding balance shouldn’t be too much greater than 30% of your credit limit.
Utilization that’s too high will warn credit issuers that you’re a potential threat for debt. Credit takes years to build and can be destroyed in seconds. Your DTI will also start to look very bad.
- DTI (Debt to Income): the ratio of debt to income
Your DTI will most likely be above 40%, and possibly up to 80% when using credit. Remember that real estate and rental properties are investment opportunities, and if this investment is going to dramatically increase your debt to income ratio, it’s not a profitable investment.
If using credit pushes your debt to income past 50%, you should reevaluate your choices, since you’re going to be owing more than you’re making. Remember you want to be making money, not owing money!
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Cash Advance Fee
When you take out a large amount of money through your credit card, you will be charged a 5% fee. If you’re taking out $40,000 for the down payment, that’s $2,000 just in fees.
That amount will be added to how much debt you’re taking out; ask yourself, is it worth it?
For more information about cash advance fees, check out Credit Karma’s article about cash advance fees.
Moral of the Story- Should I Use Credit Cards to Buy Real Estate?
If there’s a takeaway from this post, it should be that using credit cards isn’t the way to go, especially when considering the many cons. You can easily enter a black hole of debt, and it could take you years to pay off your credit card debt, interest payments, cash advance fees. And that’s just for the down payment.
There’s too much risk, the payments can get extremely high and out of hand, and your credit can be severely and irreparably damaged.
Although it’s simple and quick, and you can get 100% financing in a second, consider if this option is the right one for you.
Remember the rule with credit cards: if you can’t pay it off immediately (or very soon after,) you shouldn’t buy it. This rule applies for financing real estate with credit cards.
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