Should You Use Credit Cards to Fund Your Rehab Property

Few things in life are as frustrating as finding the perfect investment property but not being able to capitalize on it due to a lack of funding. Whether you’re a new investor who simply doesn’t have a large nest egg to draw upon or an experienced investor whose assets are already tied up elsewhere, a lack of cash flow can kill a project before it gets started.

In situations like this, does it make sense to turn to credit cards for funds?

The short answer is no, it doesn’t. While it might be tempting to put large or even small portions of your flip expenses on credit cards, the risks involved are simply too high in most cases to be worth the potential benefit.

Let’s start with the actual property. Assuming anyone would let you put a portion of the purchase price on a credit card (which is highly unlikely), if the flip fell through (which, however remote, is always a possibility) you would be on the hook for whatever portion of the flip you paid for with credit. Credit card debt isn’t backed by property. The longer it takes you to pay back your debt, the more interest you’ll get buried in, and interest on credit card debt is often in the 15-25% range.

But that’s an extreme. The area where a lot more investors are likely to consider using credit cards is remodeling costs. It may feel relatively safe to put $10,000 to $50,000 worth in remodeling costs on one or more credit cards, but it’s still a big risk. Again, if the property doesn’t sell right away or if the market takes a hit and you don’t end up with the profits you needed to pay off your cards, you’ll be in big financial trouble.

That said, when you’re strapped for cash and need to keep a flip moving, there might be circumstances where turning to credit cards might be the fastest, most prudent choice for last-minute house flipping funding. In such cases, consider all of your options first. For example, you might be able to access reasonable hard money loans or get a personal loan from a friend or family member. If credit cards are truly your best option, follow these best practices:

• Open new cards with optimal signing bonuses. You’re about to put thousands of dollars on a new card. That can translate into free flights for the next few years or a substantial amount of cash back with the right credit cards. Opening new cards also makes it easier to keep your business expenses and your personal expenses separate. And, perhaps most importantly, new credit cards usually have introductory interest rates that are substantially lower or even 0% for the first year. That means that if you can complete your flip and pay off your cards within the introductory window, you may get great bonuses and not cost yourself anything in interest.
• Create a budget and stick to it. If you’re using credit cards for more cash flow, there’s a good chance you’ve gone over budget already. Don’t treat your credit as an endless well. Instead, think of your credit as a limited short-term loan and take the necessary steps to keep your costs under control. That may mean altering your remodeling plans to cut costs or getting your hands dirty and doing more of the work yourself.

Again, while credit cards can be a useful crutch in certain circumstances, they should absolutely be thought of as crutches. There are much more secure options out there, such as house flipping loans that include cash for remodeling. Before you start making offers on properties, make sure your funding is ready first. That will help you make the best researched and most fiscally sound investment decisions.