Author Topic: Case study: Using CC debt as down payment  (Read 2592 times)

Bjorn

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Case study: Using CC debt as down payment
« on: June 15, 2015, 01:21:48 PM »
My FIRE plan is to own atleast 2 rental units, fully paid for and live off the rent from them. Last year I bought my first one and it has gone very well. It is a tiny tiny apartment but with a good yield in a good rental market. I felt lucky to find that deal because those type of apartments are quite rare (small, newly built, low need for maintenance, in a good location, hitting several tenant markets and at a good price for me).

My plan was originally to wait another year from now before I buy the next one because I need to save up for the downpayment. I currently have 10k and need another 40k which will take me 12 months to save up.

But guess what, the perfect deal just came my way, its a similar deal to the one I bought last year and it might take a long while before I find a similar one next year. I've been watching the local market and this is the first time in 6 months something even remotely close to last year's deal has been available. Obviously, I'm having a real itch for placing a bid on it. Its listed at 260k, so my financing plan would look like this:
10k from my own pocket
40k CC debt
210k bank loan

My current balance sheet looks like this:
Cash: 10k
Other investments: 32k (can't transfer this to cash until 2017)
Rental unit: 260k
Bank loan: 175k
Student loan: 12k

Quesition 1: Is it financially wise to take up 30k in CC debt for this downpayment?

Assumptions:
Loan interest rates are 2,5 to 3%.
CC debt rates are about 17%.
I might be able to refinance the CC debt (or parts of it) to 7-10% shortly after buying.
The rental unit will cash flow negatively (about 2k/year on average) with the interest from the CC debt.
The rental unit will cash flow positively (about 3k/year on average) once the CC debt is gone.
It will take me about 10-12 months to get rid of the CC debt, using money I otherwise would have saved for a downpayment.
It is not possible to use equity from unit no. 1 in this case (I would only get about 10k anyway).

Question 2: Which other questions should I ask myself before acting on this?

cripzychiken

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Re: Case study: Using CC debt as down payment
« Reply #1 on: June 15, 2015, 02:35:57 PM »
My quick thought is 40k @ 17% for a year... so quick math gives a cost of $6,800 to borrow that.  Ouch.  And with adding a 2nd mortgage plus the CC load, not sure if you could refi that down.

But lets drive a bit deeper - I'm assuming you are flow positive on the Unit1, and that is being rolled into paying off the CC for Unit2.  Is the -2k/yr after accounting for Unit1?

Do you need the 20% down?  Can you get a loan with PMI for the first year and then refi once you are below the 80:20 ratio?  Maybe do this by moving into the apartment for a year or two (then your rent is going towards PITI).

Non-traditional loans - I'm thinking something like Prosper or Lending Tree.  Not sure what their rates are, but I'm guess it's better than 17%.

Can you afford to pay for 3 mortgages (your rent and 2 rentals) and the heavy CC bill if you have a vacancy?  That seems like a huge debt load.


If I was in your shoes, I'd skip this deal.  Too much risk by increasing the debt load you have.  You made it sound like 1 or 2 of these deals pop up each year, I'd just wait for the next one and double down on saving so you don't have to skip the next one.  Another 12 months of savings won't mess with your FIRE plan, were one bad turn with that much debt could completely derail you.

forummm

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Re: Case study: Using CC debt as down payment
« Reply #2 on: June 15, 2015, 06:07:21 PM »
If you could get 0% on the CC, maybe. But not 17%. That's terrible. Hard money rates are less than that. Do you have any family or friends that would invest at a decent interest rate for a few years?  Can you take out a second on your other rental? I keep getting unsecured offers from Wells Fargo and my credit union. The rates are 7-12% (my credit is excellent). Maybe look for something like that? Or borrow from a 401k? Or a HELOC against your house (if you own one)?

Bjorn

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Re: Case study: Using CC debt as down payment
« Reply #3 on: June 16, 2015, 11:17:02 AM »
Quote
My quick thought is 40k @ 17% for a year... so quick math gives a cost of $6,800 to borrow that.  Ouch.  And with adding a 2nd mortgage plus the CC load, not sure if you could refi that down.
With refinancing I was thinking of taking out loans from family/friends that will help me clear the CC debt in an instant and instead pay them off at 5-10% interest. I will need some time to convince/explain them and the deal is happening now so I need to move on it now.
Refinancing the other unit is not possible, the bank knows Im renting it out and they require 30% equity in rental units, which is what it has currently. This is the norm here in Norway :/

Quote
But lets drive a bit deeper - I'm assuming you are flow positive on the Unit1, and that is being rolled into paying off the CC for Unit2.  Is the -2k/yr after accounting for Unit1?
Unit1 is cash flow positive with 2k/year. Unit2 will be cash flow negative with 3k when I include the interest from the CC debt, and positive 2k when its paid off. So in total both of them will net -1k now, and +4k when the CC debt is gone.

Quote
Do you need the 20% down?  Can you get a loan with PMI for the first year and then refi once you are below the 80:20 ratio?  Maybe do this by moving into the apartment for a year or two (then your rent is going towards PITI).
I have tried finding ways around this but rules are strict and I need atleast 15% down. Most banks want 30% down but minimum requirement is 15% by law here (Norway). I could try find someone to put down equity for me, but my family is not in a position to do that and with friends its just way easier asking for a loan (even asking for a loan is abit embarrassing for me).

Quote
Non-traditional loans - I'm thinking something like Prosper or Lending Tree.  Not sure what their rates are, but I'm guess it's better than 17%.
I will try check out other lending institutions. For now I've just browsed the many consumer debt/CC companies we have.

Quote
Can you afford to pay for 3 mortgages (your rent and 2 rentals) and the heavy CC bill if you have a vacancy?  That seems like a huge debt load.
Yes, I can afford it. I save about 3k/month. The rental income from both units will be abit above 3k/month and they will be slightly cash flow negative with the CC debt. So this means with complete vacancy my savings would be zero every month, but I'd afford it.

Quote
If I was in your shoes, I'd skip this deal.  Too much risk by increasing the debt load you have.  You made it sound like 1 or 2 of these deals pop up each year, I'd just wait for the next one and double down on saving so you don't have to skip the next one.  Another 12 months of savings won't mess with your FIRE plan, were one bad turn with that much debt could completely derail you.
Thanks for your honesty and good tips. I agree there are risks that can make this an unprofitable venture.

Bjorn

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Re: Case study: Using CC debt as down payment
« Reply #4 on: June 16, 2015, 11:35:43 AM »
Thanks to both of you. I've filed a few loan applications and it looks like I can get CC debt at 12-13% in the best cases, but would have to use several companies instead of just one.

If all goes well, I will have paid off the CC debt in a matter of 10 months. If I manage to get loans from friends/family it will be even quicker. So the cost of that debt will be less than $6800. I agree the interest rate is high, but this deal is very doable and might take a while to appear again. Maybe it will come around 3 months from now, or 2-3 years. I don't know. But my gut feeling says go for it and "they" always say trust your gut.

I'm browsing through real estate deals every day and none of them is cash flow positive unless I calculate with unrealistically high rent, zero SHTF-costs and a downpayment that is high enough (30%-ish) to make a noticable impact on financing costs. Thats how expensive prices are here and you can forget about the 2% rule. The best ones are just below 1%. This deal is rare. It comes out at 0,7% and ticks all the boxes I'm looking for in a rental unit. I saw a similar good one 6 months ago and still think about it, almost regretting I didn't go for it.

This is hard.

James!

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Re: Case study: Using CC debt as down payment
« Reply #5 on: June 16, 2015, 01:50:33 PM »
Perhaps a stupid question, but you know that you can even logistically pay the down payment with a CC? I always paid with a check so I never asked... Otherwise you'd be forced to do a cash advance at a different rate.

-J

Bjorn

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Re: Case study: Using CC debt as down payment
« Reply #6 on: June 16, 2015, 02:32:10 PM »
Perhaps a stupid question, but you know that you can even logistically pay the down payment with a CC? I always paid with a check so I never asked... Otherwise you'd be forced to do a cash advance at a different rate.

-J
True. I guess I could even pay the CC with a CC, so as long as I can find deals where you have e.g. "1 month no interest" the borrowing cost can come down a lot. It will require abit of planning and time to follow up and I'm not sure how many CC companies we actually have in this small country. But definetely worth a try.

zinethstache

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Re: Case study: Using CC debt as down payment
« Reply #7 on: June 16, 2015, 02:41:21 PM »
Not sure about qualifications in Norway but in the U.S. , there is a Debt to Income (DTI) ratio threshold. So if you get these high interest CCs, declare them as your down payment, that then increases your monthly debt, raising your DTI. In the states for qualifying on a non-primary mortgage that is 30%.

Make sure your monthly CC payments wont push you out of the qualifying range for your loan.

Also the previous poster makes a good point, you need a cash advance, my two CCs have very high limits, but I can only take out 1/4th of that as cash... I would need to get a bunch of cards to come up with 40k cash.