Pros and Cons of Using a Credit Card to Invest in Real Estate

Real estate investing continues to grow in today’s market despite rising interest rates and increasing home prices. In 2018, over 11% of home purchases were investment properties — the highest rate on record since 1999 and an increase over the last three years, according to real estate analytics company CoreLogic. Not surprisingly, the growth is attributed to new and smaller investors focusing on starter-homes and markets where they can command high rents. 

Market conditions aside, the goal of real estate investment is to make a profit, and how you choose to finance a property plays a role in profitability. Purchasing in cash is ideal — a choice 42% of investors make — and taking out a mortgage is a natural choice. But for investors without the cash flow (or who want to reserve it) and for those who seek an alternative to a mortgage, there is a creative financing option: using a credit card.

Yes, you can use a credit card to invest in real estate. From purchasing a low-priced property outright to covering the costs of renovations, credit cards can provide investors with an alternative to traditional financing or tapping into home equity.

But is it a good idea? Before you incorporate plastic into your investment strategy, be sure to weigh the pros and cons.

Pros of Using a Credit Card to Invest in Real Estate

• Faster buying process. Using a credit card can streamline the buying or renovation processes significantly. No lender or mortgage approval to deal with means instant financing, a quicker time to close, less paperwork to complete and no potential financing delays. 
• Fewer closing costs. You’ll avoid paying any closing costs associated with a mortgage, such as an application fee, origination fee, appraisal and escrow fees, thus improving your bottom line.
• It can close the refinancing gap. Lenders have a loan-to-value ratio max of 97% for a traditional refinance, meaning you can only finance up to 97% of the cost of your home. Assuming you have a high enough balance, you can potentially use a credit card to finance 100% of the cost.
• Potentially lower interest rate. If your card has a zero- or low-interest promotional rate, you’ll come out ahead of traditional financing. This can provide significant savings, especially when compared with using a cash-out refinance or home equity loan for renovation costs. Instead of paying interest on the total cost of renovations, you can purchase supplies and materials at no or low interest.  
• You can avoid using your home equity. Using a credit card instead of a cash-out refinance, home equity loan or home equity line of credit (HELOC), avoids the risk of tying renovations or purchase to an asset.

Cons of Using a Credit Card to Invest in Real Estate

• High risk factor. The most significant drawback to using a credit card to invest is risk. You could potentially overextend yourself. Should anything affect your ability to make payments, you’ll have fewer protections and fewer options than with a mortgage.
• High payments. Your credit card payments will be significantly higher than a mortgage amortized over 15 or 30 years.
• Your card can be canceled abruptly. If your credit card company decides to close your account, payment will be due immediately. This can put you in a bind if you aren’t able to pay in full.
• Your credit score will likely drop. Putting a large purchase on your credit card increases your credit utilization ratio, a factor that comprises 30% of your FICO Score.
• Your debt-to-income (DTI) ratio increases. Your credit card payment will raise your DTI, and a high DTI may impact your ability to secure financing for other purposes.  
• Potentially pay more in interest. Unless you’re taking advantage of a no- or low-interest rate, your credit card will likely carry a much higher interest rate than a mortgage, refinance or home equity loan. 

What to Consider Before Using Your Credit Card to Invest in Real Estate

You’ll need a high credit limit

The biggest potential hurdle to overcome is that you’ll need a credit limit high enough to support the purchase, down payment or renovation. Consumers have an average credit limit of $22,600 spread across four credit cards, according to Experian, so depending on your limits and how you plan to use your card, you may not be able to cover the expense. 

You may not be able to use your credit card directly

If you’re considering using a credit card for a real estate purchase or a down payment, you’ll need to check with your closing agent, attorney or mortgage company to see if it’s allowed. If renovating, keep in mind, some contractors will accept a credit card as payment, but not all, so you’ll need to find out ahead of time. 

To work around the limitation of using a credit card directly, you could take out a cash advance. But typically, you’ll pay a higher interest rate on a cash advance than purchases. Also, your credit limit on cash advances may be lower than your total limit. Alternatively, you could use a third-party payment service, such as PayPal or Plastiq, to access your credit card, but they also charge fees.

You can leverage a HELOC as a credit card

If you have a HELOC or are considering taking one out, you could access it as you would a credit card. Depending on the terms, you’ll pay the debt down faster than with a traditional mortgage amortized over a longer period. Keep in mind, that using a HELOC ties your renovations or property purchase to an asset, putting it at risk should you encounter difficulty making the payments.

This article has been contributed by Callie McGill.