Quite often, real estate investors will run into a gap of funding when closing on a property. Whether it’s for the down payment or rehab money, it can be incredibly frustrating to quickly come up with another couple of thousand dollars. Investors who have to scramble might start looking at the credit cards in their wallets as a stopgap solution. But how would that even work? Can a credit card be used to put money down on a real estate deal, or is that a non-starter?
Credit cards can be used for down payments or rehab loans, though not directly. A strategy involves either using a cash advance against your credit line or bringing on a third-party company that runs your credit card for a purchase and wires money from that purchase to a title company.
Both ways have their own pros and cons. So let’s get into talking about what to expect using either cash advances or third parties and what to expect throughout the whole wire transfer process.
How to Pay for a Real Estate Purchase
Real estate transactions work like this:
The buyer of a property will wire the agreed-upon purchase price to a title company. The title company then transfers ownership of the home from the seller to the new buyer.
Whether you’re dealing with the homeowner looking to sell or a bank wanting to get rid of a foreclosure, the process is the same. You should always deal with a title company that can act as an intermediary and not the seller.
Title companies will not accept credit cards, checks, or cash. They have what’s known as “good funds laws.” Title companies can’t just take a check, even if it’s a bank check. Imagine if the check bounces after the title has been transferred. Rescinding the deal after could get messy, so the only way they’ll do business is through wire transfers. Consequently, you can’t just plunk down your American Express card and call it a day.
Previously if you wanted to use a credit card, your only method was through a cash advance. There’s actually another way to do it now that I’ll get into shortly, but let’s cover cash advances.
What is a Cash Advance?
Cash advances are when your credit card company will convert your credit line into cash and transfer that cash into your bank account. Cash advances are rarely a good idea if you’re looking for a long-term solution; they’re really only suitable for short-term transactions where you can pay the advance off quickly.
Typically, you can expect your credit card company to offer around 50% of your available credit line for a cash advance. The interest rate is usually much higher than your normal interest rate; expect somewhere around 20-25%.
Once you request your cash advance, your creditor will do an ACH transfer directly to your bank account. Timing varies based on the time of day and your bank, but this is usually around 1-3 days.
Can a Credit Card be Used to Put Money Down on a Real Estate Deal?
Cash advances exist for a good reason: emergencies and short-term loans. They should never be used for impulse purchases or things like family vacations.
But I don’t want to completely scare you off of using the credit that’s available to you. If you’re savvy and play your cards right, cash advances may be well worth the cost.
Here’s an example of when a cash advance would be a good tool to use:
- Let’s say you’ve found a property for sale that has an asking price of $80,000.
- Based on your research, you’re pretty sure it would sell for $150,000 after a few upgrades.
- Your rehab costs will run around $20,000.
- Let’s say closing/loan costs run another $10,000
- Unfortunately, your bank will only give you a loan for $100,000, but you have a credit card that has $20,000 of available credit.
- Your credit card gives you a $10,000 cash advance at a 30% interest rate.
30% of $10,000 is $3,000. Your potential profit on the home is $40,000 ($150k – $110k) . Would you spend $3,000 if you could make an additional $37,000? I know I would!
Questions You’ll Need to Ask Before Using a Cash Advance for Real Estate Investing.
The timeline for closing on a home is tight and won’t allow for much wiggle room. It’s important that you understand exactly what time frame you’re dealing with and then pad that time for “worst-case scenario” events.
A few questions you’ll need to have answers to:
- How long will it take for your credit card company to get the cash advance into your bank account? If it’s 1 – 3 days, I’d recommend adjusting your timeline to account for the three days. You never know what could go wrong! It’s best to plan for the worst and hope for the best.
- How long will your bank hold that money before making it available for wire transfers? If you’ve had a long-standing relationship with your bank, they may clear your deposit right away. Some banks, however, may hold the money for 2-3 days which could make you miss your deadline.
- How long will it take for the title company to receive your wire transfer once it’s initiated?
Another Way to Use Your Credit Cards
Like I said earlier, there are now new ways you can use your credit cards for real estate investing that don’t involve hefty cash advance interest rates. Companies like Plastiq are now becoming an alternative that cuts down both time and cost.
What these companies do is swipe your credit card like a regular purchase. They then take that money and will wire it directly to the title company for you.
Since you’re not taking a straight cash advance, you’re no longer stuck with only 50% of your available credit. You also no longer have to wait for the money to hit your bank and for the bank to clear it.
So what’s the catch? They’ll usually take a percentage fee of your purchase price. The percentage varies, but it’s usually way less than what you’d be spending with a cash advance.
What You Need to Know About Wire Transfers
I want to emphasize how important it is that you know the way a wire transfer works. Getting it wrong can be, and I’m not exaggerating, catastrophic.
Title companies will have a hard deadline for when your wire transfer must be received. While a typical wire transfer will arrive the same day, there are cut-off times that might push your transfer back a day. If you need a wire transfer delivered ASAP, make sure to send it before 2 pm.
Wire transfers are permanent. Like, permanent permanent. Once a wire transfer is sent, it cannot be stopped or reversed. Therefore, you must have the correct information before sending a wire transfer as it cannot be canceled like a check or refunded like a credit card transaction.
While credit cards and cash advances are the most prudent way to conduct real estate transactions, nothing is stopping you from using your available credit. If you want to go the cash advance route, make sure you plan to pay it back as quickly as possible to save you a high interest rate. If you decide to use a credit card intermediary who sends your wire transfers through as purchases, make sure they’re reputable and have all of the correct information ahead of time.
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