Over-using credit cards can lead to financial disaster. Alternatively, careful use of credit cards can jump-start a successful real estate investment program. Under what circumstances should you use credit cards to fund real estate purchases? When should you leave your credit cards alone?
Perhaps I should tell you the story of my first home purchase. I purchased my first piece of real estate in Chicago during the late 1970s. At the time, the city was in the midst of a relatively new real estate phenomenon. Real estate developers and investors were feverishly purchasing large and mid-size apartment buildings, renovating them and converting them to condominiums. I had recently arrived in Chicago from college to start my first job. Arriving at the beginning of this condominium craze, I was immediately attracted to what appeared to be an excellent ground-floor opportunity. Houses in the Chicago area were well beyond my means, but the cheaper two-bedroom condos were within reach.
While I was otherwise qualified to purchase a very nice condominium in a turn-around Chicago neighborhood, what I did not have was money for a down-payment. I stayed awake at night trying to envision a way to pull together what was needed. An older buddy at work told me the story of how he purchased his first house using credit cards. This information was just what I needed to put together my first down payment. I used my only credit card and one that my parents had to put my plan into action.
The plan worked well for me because: my credit was very good at the time and drawing down the maximum under my card did not dissuade the mortgage lender; I had full access to my card and was able to tap my parents’ card; I had a stable job and earned enough to service the credit card debt, the mortgage loan, and still be able to repay my parents within a year; and lastly, I am a bit of a risk taker, and fortunately the risk paid off.
Using credit cards as a tool to help finance real estate can be useful. Credit cards are convenient, versatile forms of financing. Usually, you can borrow and re-borrow up to the cash advance limit as needed. Finally, you have already been approved to use them.
There are, however, some big negatives.
The repayment requirements are fairly stiff. Most credit cards require repayment of the outstanding balance within as little as 42 months. This short time frame may not fit your cash flow circumstances.
Another negative is that high card balances will negatively impact your credit rating. If you have great credit and you can afford the credit card payments, it might be worth taking this risk to buy good real estate.
Using credit cards and other consumer credit can be addictive. If you have little self-discipline in this area, it is probably best not to use your cards for real estate. You might be better served by ridding yourself of credit cards altogether.
Lastly, the interest rates charged by the credit card companies are relatively high. Rates can range from 12% to well over 18% per year. These high rates will eat into your real estate gains.
Given the advantages and disadvantages, do credit cards make a good choice for financing real estate investments? This method certainly is not an ideal one because of its high risk. It would not be my first choice. I would tap other assets like life insurance cash value or money from a 401-K plan ahead of using credit card debt.
I would only recommend this financing method as a short-term arrangement, if you have run out of other alternatives. Additionally, it probably makes little sense unless: you have a stable job; you can afford to service the credit card debt; you can afford the real estate mortgage and can manage the related real estate expenses; and you will still have money left over to live fairly comfortably.
Notwithstanding the benefits and risks, the credit card option is one worth noting.
About the Author
George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in equipment financing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: www.ltileasing.com.