What about buying a house on Credit Cards?????

Question

I am thinking about getting enough credit cards to buy a home with them instead of using the bank..

Here is why.. I bought two homes this year and I am almost out of money.. My thought is this. If I can buy a third house using only credit cards I could then get  a home equity loan later on down the road and pay the cards off. Next I would use the paid off cards to buy another home... Rinse and repeat.
Does this sound like a doable idea?

Any suggestions?

Cheryl C. · Answer

I'd rather have the credit cards as a safety net.  Dave T. is correct about the upfront fees.  Have you talked with any smaller regional banks about your plans?  Perhaps you can get financed using a blanket loan encumbering all your properties.  I had to do this years ago and as the equity increased, I was able to add more properties.  Something else we did (but we were young and had no kids) was buy fixers/great deals with FHA or 95% financing, live there for a year, keep the house as a rental and move to the next one.  We sold a few along the way to raise cash or 1031 into more properties.  We ended up with about 10 properties by age 30.

At one point I got some unsecured lines because I had proof of a history of success.  If you are highly levered or lack solid w-2 income, these ideas may not be an option.  For a few years we had to target owner financing because we couldn't get a regular loan.  Back then I hadn't even heard of HML.

Dave Toelkes · Answer

Don't forget that the credit cards will have a transaction fee, normally 3% to 5% of the balance you charge.  Interest, if any, begins accruing immediately.  And, you have to make a minimum monthly payment of between 2% and 5% of the outstanding balance.

If you don't have any cash, how will you make the monthly credit card payments?  One late payment could increase your interest rate on the balance to something near 30%.  Additionally, if you are late on just one card, the rest of the credit card issuers could raise your rates under something called "universal default" (late on one is late on all).

Too big a gamble, in my opinion, especially if the property you purchase does not generate income right away.

David Beard · Answer

Everyone made great replies. I'll just add that those that do this would typically set aside some of the amount borrowed to make the minuimum payments on the CC's (in response to someone previously).

Also, if you can demonstrate that the CC debt was used to acquire the property, the interest should be tax deductible (Dave T can comment on this, I've never heard him say anything incorrect about taxes).

Obviously, it's a 180 degree different financial world than 4 years, ago, exponentially more difficult to get financing, particularly NOO HELOC's.

If you can hold for 6 mths to one year, however, you might well be able to use a new appraisal, picking up the appreciation you forced into the deal, in your refinancing and do this with little or no net funds invested when the dust settles.

So if the stars all align... jackpot.  But lots of ugly scenarios.  You should definitely have a bank lined up that will at least APPEAR willing to lend to you at the 6 mths to one year mark.  Remember, they'll look at collateral value, debt coverage ratios, debt-to-income ratios, available liquid reserves (this one may kill you), and successful 2-year track record in real estate.  Sometimes they won't give you credit for paying off a credit card balance with the loan proceeds (after all, you can just run it back up).  So you should get pre-qualified with a bank before attempting this feat.

Besides, every guru "claims" they used credit cards in their wild-and-wooly early days to start their fortune-building!

Jon Holdman · Answer

Not sure why you would say that, Curt.  My credit card companies send me checks at least once a month offering some zero rate deal.  Sometimes they include "purchase checks" you can write to yourself or anyone else and still have a zero or low interest rate.  If you can borrow money from a credit card company for a low rate (meaning, anything less than the 15% a HML will charge), why not?

Well, there are some risks.  One is that you charge up all your cards and hurt your credit score to the point where you can't qualify for the refi.  Another is that the cards have some gotcha's on them that let the company raise the rates to punitive rates that would make a HML blush.  A third is that you may have a tough time getting a LOC on an investment property.  A fourth is that you might have a hard time even doing a cash out refi and end up stuck paying some horrible rate on the money on the cards.

Travis Elliott · Answer

""Check out Prosper.com and LendingClub.com, they are probably cheaper solutions if you have decent credit. I got a loan from Prosper about 4 years ago. ""

My top score as of last week was 805 and my DTI only has my truck payment as a debt. So I am sitting pretty good. I am closing on the second house this Thursday but like I said I want to plan for house number three four and so forth... I could pay the house off that I am buying Thursday  in four years and then use that to buy others but it would put me on hold for that amount of time..

Shanequa J. · Answer

What if you used your credit cards to buy the house for someone you know and trust then they "sold" the house to you through seller financing? It would be a rate and term refi. Is that illegal, stupid, or both?

Steve L. · Answer

I am not against this idea as the rest of you guys.  It definitely isn't the best option.  Early on I financed much of my expansion via credit cards, my credit score tanked, but I paid them all back.

You would be much better of using it for a flip (short-term cash generation).

If your existing budget (aka day job) can support the extra minimum payments that gives you a lot more safety.  If you are planning to get loans your credit score will probably tank if that is a big % of your available balance.

Check out Prosper.com and LendingClub.com, they are probably cheaper solutions if you have decent credit.  I got a loan from Prosper about 4 years ago.

Carlos Flores · Answer

In another business, I had BLOC at 8% and CC offers at 0% with no payments for 1 year.  In one example, I took out $15k on a zero card.  It cost 3% for the cash advance fee.  I paid it off in the 11th month cycle to ensure I did not get caught in any bank BS.  I would not recommend this type of strategy unless you have cash to pay it off, have access to a BLOC as I did (my safety net), or have another card that you can tap to get you by a little longer.  The other key is to get business cards that do not show on your consumer report.  With that said however, I would never suggest anyone buy a house with credit cards.  Floating operating expenses is one thing, but large capital purchases like RE need to be acquired using safer alternatives.

David Beard · Answer

Sell one of your homes as a "turnkey" passive investment to busy high-tax bracket professionals in your area that could benefit from a high-yielding, tax-advantaged investment, and use the profits for a down pmt on another property.  Flip one, keep one, a tried and true method, as long as you're adding good value through the acquisition/rehab process, which I'm sure you are.

Kevin Yeats · Answer

Travis, I think I would list CCs as "option G" on my list of sources of finance.  I would have to be 100% certain that everything would work out including obtaining a HEL or refi into a long-term mortgage when appropriate.

There are a lot of pitfalls to the strategy as others have listed.

There are better options (options A thru F) that I would investigate first.

As Brian suggests, those CC punitive rates are really the death knell for the borrower.

My $0.02

What about buying a house on Credit Cards?????

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