Imagine it is 2008, at the start of the worst economic downturn since the Great Depression. Now imagine that you have $ 80,000 in credit card debt. You are going through a divorce, you are self-employed, and your income drops rapidly as the recession worsens. Faced with this kind of nightmare, most people would probably think of looking for a more traditional job, selling their house, or even declaring bankruptcy.
Not Glenn and Amber Schworm. Instead of going conservative, the upstate New York couple decided to try their hand at real estate investing, racking up even more credit card debt before turning the tide.
“We were pretty desperate,” says Glenn, recalling the day in 2008 when he and Amber, who at the time were each going through a divorce from their previous spouses, decided to buy a house and try to make it. reverse it as quickly as possible, putting renovation costs on credit cards.
It was a big risk, but it paid off – in large part because they recognized the risk and the potential pitfalls.
Start a real estate business with credit cards
Because they had good credit, the Schworms were able to get a mortgage to buy the house, but they had no money to pay for the renovations, and Glenn’s credit cards were depleted. This meant they had to put all of their expenses on Amber’s credit cards, including materials like tiles, rugs, and cabinetry. They also needed to buy tools, as they were not equipped to renovate houses.
“I’m not Bob the Builder,” says Glenn. “I was just a hungry guy.”
By the time that first home was sold, they had invested hundreds of hours of sweat capital – and put about $ 13,000 on credit cards on top of the debt they already had. With the proceeds from the sale of the house, they repaid that $ 13,000 and walked away with about $ 17,000 in profit. A year and three more fundraisers later, they had paid off the original $ 80,000 balance on Glenn’s credit card.
Pay balances as you go
The key to the Schworms’ success is to pay off their credit card balances immediately with the proceeds of their real estate investments. This is the # 1 tip Amber says she would offer to someone else who was considering using credit cards to fund real estate investments.
“It’s crucial that you use them as a short-term loan for yourself, not a long-term loan,” says Amber. “Don’t just take your profits and go on vacation and leave your credit card balance high. “
Today, the Schworms no longer do the renovations themselves. Their business, Iconic home buyers, now has 10 employees working in an office building they own in Rotterdam, New York, near Albany. They have completed around 300 real estate transactions since this first house in 2008.
“We have three more deals that we just closed today,” Glenn said when NerdWallet spoke to him in January 2016. “We are growing every day.”
Are they still using credit cards to finance renovations? Absoutely. Only now they are doing it because it is the most convenient source of funding for them, not because they have no other options.
“In our world, if you want to borrow money to convert houses, you’re going to pay between 12% and 18%,” says Amber, referring to short-term loans from so-called “hard money” lenders that are often used. by real estate investors.
Credit cards can be a cheaper solution. On the one hand, you don’t have to start paying interest until the bill is due, giving you a few weeks to float your purchases without interest. Amber also likes the option of using a balance transfer credit card if they have to carry the debt a little longer than expected.
Reaping the rewards of business credit cards
Now that their business is well established, Glenn and Amber rack up many credit card rewards with their business expenses. They went to Thailand a few years ago, and the trip was fully paid for with points.
“When 10 renovations are underway at a time, it adds up pretty quickly,” says Amber.
“Things are different now,” says Glenn. “My credit card bill could be $ 60,000 one month, $ 110,000 the next month.” These balances are manageable because the business generates the cash flow needed to pay them off.
The downside to using credit cards
Amber admits that the use of credit cards to finance these early investments caused her a lot of anxiety. “My stress threshold is not as high as Glenn’s,” she says.
Glenn said he would do it again. “If the numbers work and you can make a profit, it doesn’t matter if it’s a credit card or a grandma’s loan?” ” he says.
Even so, Glenn and Amber say they have seen other investors get into trouble by taking on too much debt. Another problem is that some real estate investors miscalculate how long it will take to renovate a property, or how long it will take to sell. Having tens of thousands of dollars in credit card debt longer than you expect can be disastrous because of the interest.
The bet paid off for the Schworms as they studied the numbers and determined with precision that they could turn a profit on their first round of the house.
“The cost of using a credit card can be high,” says Glenn. “But the cost of not closing the deal can be much more expensive.”
13.24% – 19.24% variable APR
0% introductory APR on purchases for 12 months from the date of opening the account
0% introductory APR on purchases for 12 months
Photos courtesy of Glenn and Amber Schworm