How to Use Credit Cards to Fund Real Estate Business

[Jesse Ritter]

Hello Everyone,

I recently formed a real estate LLC as a 50/50 partnership. We are looking to have credit cards as an option to:

1) Fund an entire Flip

2) Pay for materials for a Flip

Questions:

1) Should we apply for cards through our LLC or personally? I see lots of people talking about using 0% APR cards. We applied for an American Express Card through our LLC and get $2,000 of line of credit. Not much we can do with that.

2) What specific cards do you recommend and please designate whether the are personal credit cards or business credit cards (applied for as a business).

I appreciate everyone's help!

-Jesse

[Linda Weygant]

@Marcus Payne - It's likely that it was my podcast you listened to that discussed this as a strategy.  I'll repeat here what I said there - this is not a beginner strategy and it requires a LOT of discipline, organization and the ability to make AT LEAST the minimum payments until you refi.  

I'm a CPA, so the discipline and organization are second nature to me.  If struggling to remember to make payments on time is hard for you, then don't do this.

First of all, you're unlikely to be able to get credit cards in the LLCs name since it is so new.  At the very least, you and your partner will have to personally guarantee the credit.

Second, there is an issue with co-mingling funds, but you can get around it. Essentially you personally take the cash advance on your personal credit card. You then execute a promissory note to the LLC with the same terms as the payments on the credit card. The LLC then writes a check to you to pay your note and you turn around and write the check to the credit card company. I don't know if this will make it through a court case (ask an attorney), but it would likely pass the sniff test with the IRS.

Third, here's how I did it - other people's experiences may vary.

1.  I got credit cards with Home Depot and Lowe's that offer 6, 12 or 18 months of 0% interest, depending on how much you charge.  My personal credit allowed me to qualify for pretty high balances.  Something like $7500 with Lowes and $12000 with Home Depot.

2.  I had something on the order of 6 or 8 other bank cards that were all offering me cash advances of my full credit limit - anywhere between $5000 and $15000, depending on the card for periods of anywhere between 12 and 24 months.

My rehab took 6 months (roughly).  

During the rehab, I charged up Home Depot and Lowe's to the extent possible.

I then wrote myself cash advance checks from the credit cards and deposited those into my bank account.  From there, I paid contractors and other expenses as necessary.  This was a part of my credit card agreement.  If I had actually used the credit cards to charge anything (thus getting points or miles or cash back or whatever), then those charges were subject to the regular interest rate.  Therefore, I had to forego points, miles and cash back in favor of 0% interest.  Some credit cards will allow you to charge at 0% though, so know your terms and conditions.

Yes, there is a cash transfer fee of between 1% and 5% on the credit cards.  Cheap money, in my opinion.  However, this means that just because your credit limit is $5000, that doesn't mean you can pull $5000 cash advance on the credit card.  You have to bear in mind that the 3% fee will be added to your balance and if that puts you over your credit limit it can (and usually does) negate the 0% offer and your entire cash advance is now subject to the regular interest rate.

If you are late on a payment, they can subject the rest of the balance to the regular interest rate.  This is usually outlined in the terms and conditions of the card.

My credit cards had between 1% and 2.5% of monthly balance as minimum payment.  So when I needed to pull funds, I also pulled enough to make the minimum payments.... all still at 3%.  

So let's say I needed $1000.00 and I knew I would need 2% payments for 6 months.  I'd pull $1,150, use the $1000 and then keep the $150 to make the payments.  Credit card would charge me 3%, so my balance would be $1185.00 and the payments would be made from there.

The rehab finished at about the 6 month mark which, coincidentally enough, is when I had some of my 6 month payback periods coming due.  If you don't payback the entire balance by the time the promotional period is over, the balance bounces up to the regular interest rate.  Ouch!  

So I refi'd and paid off everything that was coming due at the 6 month mark.  This left me with a ton of cash left over.

I kept that cash.  Why?

Well, at the six month mark, I also moved tenants in.  The cash flow on this particular rental was enough that the rents would pay the mortgage and the payments on all of the credit that was extending out past 6 months.  Basically, I took the remaining balances, divided them up by the remaining time left on the promotional offers and set up regular monthly even payments.  I had money left over for repairs and maintenance too.

So essentially, I didn't take any money out of this rental for 24 months, but the tenants finished paying off the rehab.

I took the leftover money from the refi and bought a turnkey place, put tenants in on day 1 and that cash flowed as well.

Once the first rental had all the credit cards paid off, my credit cards were all freed up and my credit score had bounced to the moon.  All of the credit card companies wanted to increase my credit limit.  I happily allowed them to do so.

The keys to my success in this were:

1.  Excellent Credit to start with.

2.  Discipline, Discipline, Discipline

3.  Financial comfort - if my rehab had gone longer than 6 months or ran as much as 35% over budget, I still had enough other cash flow from other sources that I could have funded payments and maintained the plan.  Don't do this if a slip in time or budget is going to have the whole thing come crashing down around you.  This is not for those pushing the limits of their available cash or credit.

4.  Ability to plan.  I can build a spreadsheet to plan out cash flows and forecasts and financial models very quickly and accurately.  I'm also great with budgets and timelines.  If these aren't your strengths, this model may not be for you.

5. IF you're using this plan for a flip, be really darned sure of your ARV. If you sell and it's not enough to cover all the credit you've pulled, make sure you've got a pay back plan from your personal funds. When I did this, I was guessing at a refi appraisal figure. Had I not made that number, things would have been tight for me personally, but I'd have manage it. Luckily, this property also rented for more than what I originally thought it would too. (Really, this property was an incredibly lucky find all the way around - I haven't been able to duplicate quite this level of success since then).

People's biggest criticism of this plan is that the credit card companies charge cash advance fees.  Yes, that's true.  As I said, mine were between 1% and 5%.  When hard money loans are anywhere between 2 and 4 points PLUS 10-15%, I'll take a plan that is the equivalent of 1-5 points (mostly 3) and 0% any day of the week.

So takeaways:

1.  Know the terms and conditions of each card

2.  Plan carefully

3.  Have wiggle room in your plan (both time and money)

4.  Build contingencies in your plan.

5.  Discipline!