Most people can agree that real estate investing is one of the most lucrative ways to get wealth that is long term. The most significant problems that potential investors have is that it often takes good credit and a track record to be able to purchase property on the best terms.
Thankfully, there are ways around this issue of credit and still be able to invest in property.
It is a good thing to wonder too, seeing as 25% of all American’s credit score is lower than 600, the Wall Street Journal has stated. That is a large number of people that are without access to getting a mortgage, which, in turn, can make real estate investing complicated.
So, is investing in real estate with bad credit even possible? Well, yes, and no. It is possible to invest when you have bad credit, but it can be risky to do so. Before you begin, you need to understand the risks, potential pitfalls and details that go into the business of investing in real estate with sub-optimal credit.
Investment Property & Bad Credit
It can be difficult to purchase real estate property with a decent credit score, so having bad credit makes it harder, but not unfeasible. With these tips and ideas, you can potentially start earning an income with real estate investing soon. Just be sure to research and look into each property you are considering purchasing, no matter what the cost is of the investment, low or high.
It doesn’t help you to go around the conventional process for loans if your property you invest in is not worth it. Nowadays, there are so many shows out there for house flipping that shows multiple groups of people making good money from flipping houses. Investing in real estate has been so popular, and it may be tempting you even now. However if your credit score is under six hundred, then you could have some trouble getting the funding that you need.
Does that make real estate investing impossible for someone with bad credit?
Not really. What it does mean is that it will create a higher interest rate and more strict lending requirements. A lender often requires more from an investment loan rather than a loan for an owner-occupied loan for a home.
Investing in Real Estate with a Low Credit Score
So if you are serious about learning how to invest in real estate with a credit score that is less than great, let’s go over some ways that this can be done.
It is important that you are at least trying to improve your credit while attempting this. This is because your credit affects so many aspects of your life that it is important to improve your score, not just to invest in real estate, but to better your life in general.
Partner Up!
A partnership is a great way to invest in real estate. Everyone is missing something, and another person, your partner, can help to fill that hole. That might be, in your case, your credit score being bad, but you may, in turn, have something to offer the other person that they do not have.
That could be time, hustle, skills, or anything that you can offer that another person may not be able to offer and will need. That is how a good partnership will work and last, both parties bringing something to the table that the other cannot so both come together, creating a whole.
As with any type of agreement, you need to be careful. Choosing the wrong person for a partner can create a bigger problem for you in the long run. It is important that you do your research and choose a partner with care, and be careful what deals you choose to invest in. The only real negative to a partnership is that you will have to split the profits that you make with the partner.It is a great way to get a career in property investing started in the right direction though.
Get A Co-Signer
You can also look for someone who would be willing to cosign for you if you cannot get a loan or find a person interested in being your partner. This person will stand in for your loan, using their credit for you. It is important that you are able to repay this person for the loan as it will not only affect your credit negatively but also will affect theirs. Be sure that you first are able to make the payments monthly before you have someone put their credit on the line for you.
Finance With A Seller
This is a process in which the seller will, instead of making a person get a new loan, agree to the financing of a property. How this works is that the seller will allow you to make payments every month to the seller until you pay off the loan, or until the seller-financed loan term is completed.
Financing through a seller is a powerful option, as most sellers do not ask a buyer to see their credit score. This type of financing works best if the seller of the property has complete control of the property, meaning that they do not have any mortgage or loans on the property.
When a seller attempts to do what is known as carrying the contract for a home that currently has a loan on it, a lender has the ability to foreclose on that home due to a clause that is known as a due on sale clause. That is why it is best to stay away from sales that involve mortgages and search for deals that do not have owners with mortgages.
Seller financing is likely to become much more popular in the next few years, this is due to the Baby Boomer generation of homeowners that own rentals will likely be looking to get out of the renting business, but still, keep the income they received monthly.
This type of financing is a solution that works for all that are involved in the deal. It can even be a way to finance without putting hardly any money down.
Hard Money Lending
Individuals or businesses that offer to lend money with interest rates that are high and offer terms that are short to real estate investors are known as hard money lenders. The rates for hard money often vary, but average around ten percent to eighteen percent interest and other terms that are less than two years, usually lasting closer to six months.
Hard money lenders often also require higher fees, which are also called points.These points can add from 3% to 10% interest of the amount of the loan. Often those that become hard money lenders were once real estate investors but decided to move into a more passive option, now just lending money. Due to the short terms, high fees, and high rates, this type of loan is a perfect choice for someone interested in house flipping.
It also works well for those interested in the BRRRR option for real estate, which stands for buy, rehab, rent, refinance, repeat. It is the basic structure for successful house flipping. It allows for a real estate investor to get in and get out fast, giving the cash to the hard money lender and going on to their next home or property. It is becoming more common now, but hard money lenders often do not look or ask to see a borrower’s score for their credit.
The hard money lender is more interested in the deal’s security than anything else. Their goal is to, no matter what, make money. When a borrower fails to pay, will they be able to foreclose on the home or property and sell it for a profit? Hard money lenders can be a great option for anyone with a credit score that is low and wants to flip homes.
It is important that the person finds a deal that is amazing though, in order to make the lender feel safe. Then the borrower needs to knock that flip out of the park and make their profit.
Lending Private Money
Just like with hard money lenders, a private money lender is an individual who you may know that wants to make a profitable return on an investment. Contrary to hard money lenders, those that are private money lenders are usually not a professional in real estate that lends money for a business.
Typically they are just looking to create more diverse options for their investments.
A person that offers to be your private money lender could be a neighbor, a health professional you know, a parent or relative, or anyone you have created a relationship with over time. The key to a private money loan is a relationship.
It is not likely in this type of loan that you will be asked for your credit score, but it means that you really need to work hard to ensure they get the return they are looking for on this investment. Don’t take advantage of someone’s kindness here and lose their money.
You should avoid taking money from anyone for this type of loan unless they are able to afford the possible loss of the money if things do not go the way you plan.
Try Wholesale
One of the most popular options for someone with bad credit is wholesaling. This is where you find the real deals, contract them and then quickly sell the property for a profit.
The reason that wholesaling is so popular for those with bad credit is that the process for wholesalers is able to be done without the need for a credit check or even using any of their own money for the sale. Now while this may sound amazing, and it is, but you need to understand more about wholesaling before you run out and look for a deal.
Wholesaling is a business. This is not a passive income, and without work, you cannot get paid. Some do not even consider wholesaling as investing as you are not actually selling or purchasing the property. This requires hard work, and it will take patience, time and skills for marketing. You will also need social skills for talking to sellers, and to sell yourself to them.
A wholesaler has to be the solution to a seller’s problem, find the cash buyers, determine the cost of rehab, and get everything handled without anything falling apart. To be successful with wholesaling you need to have talent in all that is real estate investing. It is not easy work, and there are some that try to become a wholesaler and do not ever complete a deal.
Wholesaling requires a license, and there is some legal involvement with becoming a wholesaler. If you are interested in becoming a wholesaler, be sure to check out our guide to wholesaling, it will be a huge help.
Rehab a Property
A borrower that has a credit score that is considered bad is often unable to get a loan that will cover all of the cost of a single-family home. However, that doesn’t mean that you cannot qualify for a loan for the cost of a property that is considered distressed in order to rehab and flip this property to gain a profit.
Age, condition, location, and size will determine the cost of the property, and some properties can be as low as twenty-thousand to forty-thousand dollars in various markets. Next, you will need to put in work and repair the property in order to make the place livable. While this requires a bit of labor and work, it offers a great gain in profits when done right. Based on the property that you choose you can gain even more if you do your research and put in enough time and effort.
This works for mot lenders because they often look at the property’s viability rather than at your low credit score.
Second Mortgage
There are a lot of reasons a person has bad credit; it could be a bad history of repayment or just hard times that hit a person. If you already own a home, you can get into investing in real estate by taking a second mortgage out of the home you currently own. A second mortgage will not affect a second mortgage that much due to it being backed by your home or property as collateral. The only downfall to this method for financing is that it can be quite unpredictable.
If you decide to use this route for your investing you need to first be completely positive that you will be able to make the payments on your mortgage no matter what happens with the investment property. If this is done without prepping, taking out the second mortgage on you current home can potentially put both of your properties in danger.
Save, then Pay Big
Another way a person wanting to borrow but does not have good enough credit history can achieve their goal of a loan is putting a higher down payment on the home down. Putting down at least twenty percent or a higher amount upfront can help you to qualify for a loan that is above what your lower score on your credit would allow typically. This will also lower the amount owed on the home, so it is an all-around good method for saving money on your investment.
When you put a bigger down payment down on a home, you show lenders that you have an ability to save money over time and have financial stability. Your interest rate may still be higher than normal, but a larger down payment creates more opportunity for lenders and banks to consider you for a loan.This may be a method that will take more time, but it is worth it to get into real estate on your personal credit, rather than getting into it on someone else’s.
REIT Investing
Despite having so many options for investing in real estate for people that have lower credit scores, there are still some that cannot afford to buy into real estate. Thankfully, there are even options for people in this situation that involve real estate investing. Instead of trying to purchase a property by yourself, you can put your money in together along with other real estate investors, pooling your resources into a REIT, or real estate investment trust.
This type of trust puts together money from investments in order to invest in real estate collectively, mainly on a commercial basis. The goal for you may be to get into real estate investing of properties that you personally own, but a REIT is a great way to earn money as you work on your credit score or work on one of the other options mentioned earlier.
Now, let’s clear up a little rumor.
Investing in Real Estate & Working Full-Time
There is a myth that has been circling for some time that you cannot invest in real estate while working a full-time job. This is just a myth! It is not required to quit your job in order to succeed in real estate investing. There are many investors that have been successful in creating massive portfolios over years time and still working a full-time job.
Cause of Your Bad Credit
There is always a cause for bad credit, and that cause can happen for a number of different reasons. Medical bills, identity theft, lost jobs, and more can all create financial trouble for a person, and in turn, can cause bad credit. In 2007, there was an economic recession that caused millions of people to have struggled financially, as well as destroy millions of people’s credit scores during this time.
There are times; however, that credit scores being low are caused by ignorance and stupidity. Opening multiple credit card accounts and blowing the money on frivolous things such as vacations, clothes, or luxuries that were unnecessary. This kind of credit usage has caused many people to lose a good credit score and find themselves in a very difficult spot.
It doesn’t really matter why you have a lower credit score.You have it. It is done. You have credit that is considered bad. The thing you need to determine is: Is your credit problem a symptom of an even bigger issue?
This is important to know as if your credit score is low due to bad money habits, impatience, greed, selfishness, or other habits; you have a more serious issue. Most people would be in the same situation for credit, if they were given a clean slate, within a few years time. This is because a credit score is a number that is made to represent a person’s ability to manage their money financially. This is because a credit score is just a small part of a much bigger issue.
Now I am not saying this to be rude, but my point is you need to understand that if your credit score is an issue stemming from a bigger issue, then you need to fix that issue before you use these options for real estate investing.
How to Fix Bad Credit
Raising your credit score is one way that you can improve your odds of getting into real estate investing. It will help to get you better rates and more lenders will be interested in you.It is important to pay down the balances that your currently have and resolve any issues related to collections.
Be smart about what investments you are involved in. If you are looking into real estate investment, it is not a good time to finance a car or another credit card account. We discussed it earlier buy a hard money lender is the way to go for getting the funds you need, seeing as they often will not ask for a credit check. They will often require between forty to sixty percent down if you have bad credit, though.
Look for cash only deals and aim to skip putting money down. This may seem difficult, but it can be simple if you search for the right deals.
Bad credit is a stumbling block for your real estate investing dream, but it doesn’t have to stop you. Improving your credit score may not seem that important if you can get into real estate without it, but here is why you will still want to improve your score. You will get longer terms and lower interest rates from bank loans when you have better credit.
There may be a time you want to finance commercial real estate investing or more expensive homes, and at that point, you will really want to have good credit, but good credit is better no matter what type of house or property you want to fund.
Not to mention, if you are not willing to improve your credit, your problem with debt is going to come back and bite you financially.
Recovered From the Debt Disease?
There are, as we mentioned so many ways to invest in real estate with bad credit or even with no credit at all.
But, none of that matters if you are still in the same situation with your reason for having bad credit. Take some time and see what the cause of your credit problem is.
Investing in real estate with bad credit is possible. But, if your credit is low due to something else, it is important to fix the issue at hand first, or you will not be able to truly enjoy the profits you can get with real estate investing.
If you need to improve your credit and gain better management skills for your money, there are plenty of books out there that can help you with this task.
Get out there and start investing, or start the journey to better credit, or both!
