How to Invest in Real Estate Properties with Bad Credit
Americans are no strangers to poor credit scores. Every year, millions of people from every walk of life accumulate debt and interest due to piling bills, loss of income, or failure to stick to their credit agreement. Regardless of the cause, the effect is usually the same – bad credit.
However, consumers continue to use risky financing to make large purchases with unhealthy credit reports, such as cars or real estate properties, proving that bad credit is just a number.
So, if you think a poor credit score will prevent you from buying your dream home or rental property for passive income, think again. Yes, you’re likely to face certain obstacles during the loan application process and get higher interest rates.
However, you have nothing to fear if your score doesn’t fall below 620. In this post, we’ll explain how to invest in real estate properties with bad credit.
Buying Real Estate Properties With a Poor Credit Score – 8 Effective Ways
1. Opt for a Real Estate Investment Trust
In many cases, applicants with low credit scores often don’t have enough money to make a decent down payment (20% or higher). This is one of the biggest reasons people opt out from buying real estate properties or wait for extended periods to apply. Consequently, they miss lucrative investment opportunities and have no choice but to buy even more expensive homes after a while.
However, buying a property doesn’t necessarily mean you need 100% ownership. If you have a surface-level understanding of stock trading, you know it involves buying percentage shares of a company. So, why can’t you apply this strategy to real estate by opting for Real Estate Investment Trusts (REITs)?
REITs are becoming incredibly popular among investors with bad credit and insufficient cash investments. They allow them to co-own multiple properties and create a solid portfolio with fast gains and minimal entry barriers.
So, REITs are the way to go if you want to gain profits from real estate investments with minimal investments.
2. Look for Government Loans
Government loans are often targeted at people with poor credit scores or those from low-income backgrounds. Popular options include the USDA Loan, Veteran Loan, or the FHA mortgage loan, to name a few. The beauty of these loans is that they come with lower down payments and interest rates compared to conventional loans.
Plus, depending on your use case and budget, you can also use these loans to buy multi-family homes. The only catch is that you’d have to reside in the same property along with other buyers or tenants.
3. Get a Hard Money Loan
Another great option for investors with poor credit scores is to get a hard money loan. This loan aims to help you buy properties for passive income generation, meaning most investors who opt for it don’t plan to live in the properties they purchase.
The beauty of these loans is that you can get them within days, even if you don’t have an excellent credit report. Most lenders are typically concerned with the property’s value since they will use it as collateral. So, even if you default on payments, they can take ownership of the property.
4. Partner Up
Like you, there are thousands of people at a time looking to purchase real estate properties using their credit cards. Many of them simply want to avoid the busy work involved in the mix. Hence, another great way to invest in properties with bad credit is to strike a partnership with someone with an excellent score in exchange for all the dirty work and a share of the profits/ownership.
You could ask a friend, your parents, your spouse, or a colleague to join you in this endeavor. However, you need to ensure the person you partner with has a basic understanding of how real estate investing works so they can stay connected with the processes.
Moreover, you must formalize this agreement by hiring a lawyer to draft the paperwork. This method is one of the oldest investment strategies in most business sectors. Subject matter experts with limited financial resources team up with investors for mutual benefits.
5. Wholesaling or Real Estate Flipping
If you’re in property marketing for the first time, wholesaling might be the solution for you, especially if you have bad credit. This innovative approach doesn’t involve funding or financing, so your credit score makes no difference.
The strategy involves finding homes for sale online in your neighborhood or city and negotiating the price. Once you’ve secured a discount, you can sign a contract with them. However, instead of buying it yourself, you can flip the property by finding another buyer willing to pay more and secure a profit.
This tactic might not get you ownership of the property, but if you’re an investor looking to make quick profits, you can do just that via wholesaling or flipping. Moreover, if you get into the habit of flipping properties, you can generate enough capital to buy a property for yourself in cash or at least generate a decent down payment.
Plus, the capital flow will also help you improve your credit score and report.
6. Opt for a Private Real Estate Loan
Traditionally, most investors or homebuyers opt for banks when looking to secure loans to purchase properties. However, banks often have the strictest eligibility criteria and policies, meaning you need an excellent credit report, proof of income, and other details to secure a loan.
However, banks aren’t the only option for securing a loan. Today, you can find thousands of private money lenders more than willing to work with people with low or poor credit scores. The only catch is you may have to pay more interest or keep something valuable as collateral. However, depending on the lender, you can negotiate on almost everything.
In some cases, your friends, relatives, or business partner could also offer you a loan if they think you can pay them back. You can share your investment plans with them to get their buy-in and even offer them some incentives, such as a percentage of the rental income for a certain period or ownership shares until the money is paid back.
7. House Hacking
House hacking is another smart way to purchase a property with bad credit and no money. The practice involves using part or all of your existing property to generate sufficient income to offset the new property’s monthly mortgage payments.
For example, if you own a home or apartment, you can rent a bedroom, garage, or other living space to generate passive income and use the amount to pay off the monthly mortgage.
Depending on the value of your existing property, you could be living for free in your new property. For example, many people moving from the suburbs to the city rent out their large homes to multiple tenants to offset the higher monthly amount in more expensive properties.
Plus, by making lenders aware of this strategy or that you own a rental property, you can increase your chances of securing a mortgage loan on bad credit.
8. Rent-to-Own Leasing
Finally, rent-to-own leasing is the last way to invest on our list. This strategy for investing in real estate properties with bad credit involves looking for homeowners who want to sell their properties but are in no rush to do so. For the time being, you can procure the property on a rental basis and later ask the owner to sign a lease for ownership in the future without paying a huge sum of money.
Wrapping Up
Most people with bad credit believe their investment options are limited. While this may be true in some cases, history has shown that you need millions of dollars in the bank or an 800+ credit score to buy your dream home or purchase real estate properties for income or profit generation.
As you can see, the trick is to learn how to invest in real estate properties with bad credit by exploring strategies like the ones mentioned above.
It may be more difficult compared to securing loans with excellent credit scores. However, if you have the passion, perseverance, and desire to purchase properties, you’ll quickly learn to get creative, connect with experts, and find lucrative deals and opportunities in the future.
