Creative Financing! - Leveraging interest free Credit Card for Rehab

[Jordan B.]

Hi All, 

I recently purchased another rental property and planning the rehab now. I expect to pay around $40,000 to $50,000 in expenses. I wanted to creatively finance this and take advantage of any cash back/rewards. The interest free period is also a plus. 

Has anyone done this? I am thinking about getting the Chase Premier Business Ink card.

- $1,000 cash back if $10,000 spent in 3 months

- Interest free for 1 year

-  2.5% total cash back on every purchase of $5,000 or more

 - 2% unlimited cash back on all other purchases

- $195 annual fee but i plan to cancel after done using it. My cash back will outweigh the annual fee as well. 

Is there a better card to consider? This seems to be best I found for my situation. 

[Andrew Postell]

@Jordan B. oh boy.  Ok, so, let's start at the very beginning here - why didn't our lender provide us enough money to buy and rehab the property?

I'll guess at this - that either the lender didn't offer this type of a product (because we were working with an incorrect type of lender) or because "the numbers didn't make sense to do so"...which means it wasn't a good deal in the first place.

I don't mean to come down so hard on your deal but I do need us to reset a little bit here.  I have certainly made my fair share of "mistakes" in real estate and am just fine.  You will be fine here too but for every person who successfully borrows against credit cards in this way there are 99 that get into serious trouble.

Some things to consider when analyzing this type of a technique:

1. Negative Cash Flow - How will you pay back your credit card before the introductory offer runs out?  Meaning, you will have your current mortgage payment and your current credit card payment...and no cash flow on your property because of these two payments.  So, how will you pay back $50,000 before the 0% runs out?  And you won't.  Your credit card interest rate will inflate in the 20% range (more on that in a moment) and your payments will skyrocket.  So, now we need to calculate our cashflow on year 2 to be EVEN MORE NEGATIVE than when we started.  That's #1.

2. Your Credit Score - When you open a new trade line your credit score goes down.  This is normal for all credit items.  Once you have good payment history your credit score will rebound because they see that you can pay the new debt.  This is factored into the formula on how your credit score is calculated. HOWEVER, you will then be MAXING OUT your account.  This will significantly hit your score.  And if you can't get the entire $50k on one card...now you have to open up multiple accounts, maxing out each one, and your credit score will get crushed.  I have seen scores go down 100-150 points when people do this.   Anything over 70% of the balance negatively impacts your score.  Double whammy. 

3. The Plan - so how do you overcome these issues?  And that's what we need to plan for.  

Again, don't mean to be so gloomy here...but if I know what moves will occur on the chessboard then I start to plan on countering them.  And that's what we need to do here.  

Hope all of this makes sense.  Feel free to ask anything additional if you need.