Don't try to fix and flip houses with 0-percent cards
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Dear Your Business Credit,
Hi Elaine, I am a fix and flipper. I want to buy homes with as close to zero down as possible. I have good credit in the 700s, but no money in a retirement plan or equity in a home. I am thinking 0 percent credit cards could provide me the cash advance I need to cover most of the down payment required by my private fix and flip lenders. I would pay back the balance after the home is flipped 6 months later, so I have a clear exit strategy. Are 0 percent credit cards viable? – Ed
I would not recommend financing a home purchase with credit cards. I ran this past several professionals involved in real estate transactions and most thought this is a dangerous idea, even there are some buyers who combine loans from hard money lenders and credit cards to purchase a property.
“Financing a fix-and-flip project with 0 percent credit cards may be feasible, although it would be very risky and not advisable,” says Jeffrey A. Hensel, a hard money lender at North Coast Financial Inc., in an email. His San Diego firm specializes in fix-and-flip loans, among other types.
“Fix-and-flip projects require adequate cash reserves and are not suited for investors with very little or no cash on hand,” Hensel adds. “These projects involve a high amount of risk, as the investor may come across unforeseen issues with the property, which can increase both the amount of funds needed to complete the rehab as well as the time to complete the project.” You need to have enough money to cover various holding costs, such as loan payments, insurance and taxes, he explained. The costs may pile up very quickly, leaving you without enough funds to finish the rehab, he says.
There are also practical reasons it would not work well. You would need to take a large enough cash advance from the credit lines to raise a big enough down payment, which would be hard, given that cash advance limits on credit cards are often limited to a lower amount than the overall credit limit for the card, he says. “Multiple 0 percent credit cards may be required in order to raise the necessary funds.”
Todd Yokomichi, a Denver-based realtor, mortgage and insurance broker has fixed and flipped more than 10 properties using hard money lending. He also advises against using credit cards to buy properties.
“Personally, I would fear that this buyer is one misstep away from financial hardship,” he says in an email. “There are so many variables that can arise in a fix and flip, and if the project goes sour, the buyer could be looking at losing the property to the hard money lender, incurring a lot of unsecured credit card debt, and possibly finding themselves underwater.”
So what can you do to achieve your dream of buying properties and flipping them? I’d suggest finding a partner with money to invest. If you know how to rehab the homes, perhaps there is someone who lacks those skills who would love to partner with you.
According to D.J. Carroll, a real estate investor in Carrollton, Kentucky, would-be fix and flippers with no money to invest can sometimes get into the field through what is called wholesaling. This is putting homes under contract and then flipping them to an investor with the money to fix them up for a small commission, often in the $500 to $5,000 range.
To do this, the flipper would make an offer to owners of distressed properties to buy them out for a set fee and then bring in an investor to pay them that amount, plus the commission. For instance, if a couple owns a $100,000 home in which they have $70,000 of equity but can no longer pay the mortgage, you might offer them $40,000 or $50,000 for it – allowing them to get out of their situation without a foreclosure – and then bring in an investor who pays the couple the $40,000 or $50,000 and you a $5,000 commission. One way to find investors is through Facebook advertising, he says. To protect himself, he includes contingencies in the contract. If, for instance, it doesn’t pass a home inspection, he says, “I’ll go back to the homeowner and say we’d like to retract our offer.”
I don’t think your goal of home flipping is out of reach, but I do hope you find some other means than credit cards of financing the properties you want to buy. And when you do start making money, try to put some of it into your savings, so you have the cushion you need to invest successfully. That'll make it a lot more fun.
See related: Millennials, now house-hungry, look to build credit
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