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Investing in Real Estate Using Credit Cards

Ok so I’ve had several clients that have bought books from those so called real estate investing gurus and they’ve asked about this strategy numerous times so I’m going to tell you how I feel about it. I don’t have very strong opinions when it comes to most real estate investing topics. If you ask me if you should flip houses, become a landlord, try wholesaling or stick to REITs, I’ll shrug and say, “Well, that depends.” Then I’ll walk you through the pros & cons of each. If you ask me if you should buy rentals in stable vs. shaky neighborhoods, I’ll tell you that it depends on your goals and risk tolerance. But I’m a fundamentalist on the issue of credit cards. I firmly believe that if you can’t pay a credit card in full, immediately, on the same day that you make a purchase — DON’T USE IT!

Close your eyes and Imagine: You’re a beginner real estate investor. You want to flip a house for the first time. You don’t have much money. Someone recommends that you get a Home Depot or Lowe’s credit card, which offers 0-percent financing for 12 months, and use that credit card to fund the material purchase costs for your flips. What little cash you have can be used to pay for labor (and/or your own sweat equity can be used for labor). You’ll presumably sell the house within a few months, use the profits to pay off the credit card before a single penny of interest is due, and pocket a decent payout, as well.

Should you do it? In my humble opinion: ABSO-FREAKING-LUTUELY NOT!!!

Why? I can explain my stance in one word: RISK!!!

You hope everything goes according to plan. You hope that your labor and material costs are close to the amount you estimated. You hope you don’t find any nasty surprises. You hope the city inspector doesn’t throw a wrench in your plans. You hope you can sell the house in the amount of time you estimated, for the amount of money that you estimated. Oh, you know that not everything goes according to plan. So you made conservative estimates. You tacked a 20 percent margin of error onto the material and labor costs. You pinned a 10 percent margin of error onto the after-repair value. And you hope that those margins of error are sufficient.But hope cannot defeat the reality of risk. ANYTHING could happen that might derail your plans. The city could condemn your property. A major flood could rip through it and insurance could refuse to pay for the damage.

If you’ve borrowed at reasonable interest rates, the fallout from risk-gone-wrong won’t be as bad. It’ll still be a setback, of course, but assuming you’ve leveraged wisely, it will be manageable. If you have tens of thousands in debt on a credit card which suddenly escalates into a 29 percent interest rate, though, you’ve dug yourself into the deepest pit of a hole that’s going to be excruciating to climb out of.

Bottom line: Don’t subject yourself to the risk of getting hit with crazy 20%-30% interest rates. It’s just not worth the risk.