When I first started in real estate investing, I worried about the exact same things you do—mainly, I worried about funding my next deals. Sure, I’d shored up hard money and private money lenders as well as other traditional and non-traditional funding sources but, still, I was concerned about what came next. What if my next flip went over budget? What if a funding source didn’t pan out the way I’d planned—the way I’d counted on? What if I needed a little extra to get me over an unexpected bump in the road? What would I do then? Remember, I was investing with virtually nothing—and, sometimes, nothing—in the way of a safety net. If I blew through my budget, I was out of luck.
But then I realized I’d been walking around with a solid go-to funding source in my back pocket—literally. That source? My personal and business credit cards. I had been so focused on finding and building relationships with traditional investment lenders that I hadn’t noticed I had one of the best and simplest solutions in the palm of my hand. Because even though I had barely given a second thought to my credit cards over the years, each represented something powerful. Each represented a credit line that I had access to right that minute, to use however I saw fit. And that included investing in my next property flip.
When I actually sat down with my bank statements and a calculator, though, the lightening bolt really went off for me. It was then I realized that I had more than $100,000 in available credit. While it wasn’t enough to power my next deal, of course, it was certainly enough to take some of the heat off when expenses started to mount. When my latest rehab went over budget or I needed a few extra dollars to keep the contractors on track, a quick swipe of a card could solve my real estate investor woes. It was a pretty epic moment, and definitely one that took a lot of the burden and stress off of my shoulders.
That said, credit cards aren’t a magic bullet—far from it. And, no, this isn’t a blanket “YES!” to using those credit cards anytime for anything. But it is a thumbs up if you can be smart, strategic and, above all, responsible, with your credit. In that case, credit cards can be a great tool in your real estate investor arsenal.
Before you grab your wallet, though, be sure you understand the pros and cons—and be sure you weigh your own ability to be a savvy credit card user. Because, while I’ve known many real estate investors who can and do use credit to pad their businesses, I know plenty who tried and failed—big time. And having that kind of unsecured debt looming over you isn’t good. Believe me—I’ve seen it sink some pretty solid real estate investors.
PRO: It’s Free Money—To a Point
How many loans can you think of that have NO interest? Unless you’ve got some crazy deal set up with a private money lender, the answer’s probably NONE.
Enter credit cards. While most people go on and on about their enormous interest rates, they tend to leave out the fact that you don’t pay interest if you pay the balance in full each month. So if you’re confident you can pay back your charges within 30 days—maybe you’re just waiting for the rent checks to clear or you’re closing on your next deal in the next few days—then go for it. If you’re not totally sure where you’re going to get the money to cover those charges, take a minute and ask yourself if there’s a better source for the last minute cash you need.
PRO: Points, Points, Points
If you’re good about paying back your credit card each month, then swiping it for business purchases could be a great way to earn high value rewards. Many credit cards reward users by kicking back a percentage of their total spend in the form of travel vouchers, gift cards, electronics, experiences and, in some cases, cash back.
My credit card company, for example, gives me a free domestic plane ticket every time I charge $25,000. I could easily charge that on one property. A few properties in and I could take the entire family on vacation! It’s a great deal and a great perk to using credit cards—if, again, you can use them wisely. Check your card to see if it’s got a built-in reward system. If not, head online and look for one that does. Why not get rewarded for all those purchases? You’re going to make them anyway!
CON: The Sky-high Interest Rates
Like I said earlier, a major pro to using credit cards to cover some of your investment costs is that the money is free—to a point. After that 30-day mark, though, you’re going to pay a hefty price for using your credit line. Some banks and credit card companies have interest rates as high as 10%-20%. I recently got an offer in the mail for a card with a 24.99% APR—what?!
If you allow your balances to carry into the next month, you’re going to be slapped with these massive fees. While a few hundred dollars carried for a month or two may not bust your rehab budget, let’s say, that’s not usually where real estate investors get in trouble. Usually it’s carrying thousands or even tens of thousands of dollars for many months—years, even. Not only is it tough to have that hanging over your head but, in the end, you’re going to pay back a ton of interest on that money—interest you could have avoided by building up your cash reserves or, even, looking for a loan or other financing offer with more favorable borrowing terms.
CON: Your Credit Score & Debt To Income Ratio
Depending on the type of financing you’re after, carrying a credit card balance could impact your credit score and your debt to income ratio. Many traditional banks and lenders look at these numbers to determine your loan worthiness. If you’re carrying around lots of debt, you may not make the grade based on their rigorous standards.
Before you start charging up a credit card or two, think about what loans and cash sources you’re going to need in the next 30-60 days. If your plans involve applying for a mortgage, home equity line of credit (HELOC), personal loan or credit line, you may want to steer clear of the cards. Balances tend to show up on your score within one to four weeks, which could impact your ability to secure the financing you need on the terms you want.
Used correctly, credit cards can be a great tool for real estate investors. But if you can’t be smart, strategic and responsible with yours, then steer clear. Credit card use can easily spiral out of control, doing more harm than good to you and your real estate investing business. Before swiping, assess your needs, your ability to make a timely repayment and whether you need to keep your credit free and clear for any upcoming loan applications. If all checks out, charge away—but stay on top of every purchase and make sure you’re always paying your balances each month.
We’ll tackle financing and cash sources at the Nick Vertucci Real Estate Academy (NVREA) as well as at some of my upcoming seminars and workshops. There’s nothing that new real estate investors are more concerned with than funding their deals and everything that comes with—the marketing, the rehab work, the unexpected expenses. I get it—I’ve been there. And that’s why so much of the program is anchored in the “funding” part of the process. Because you want to know and you need to know. And we won’t let you down. Check out the website for more information and to enroll.