Doesn’t it always seems that banks are willing to lend you money (or a particular type of money) when you don’t really need it?
When I think back to when I first got out of college, I was having trouble building credit and even getting a credit card, but today I’m solicited for credit cards by banks nonstop. It’s similar with lines of credit too, especially business lines of credit.
So, if your access to capital is limited and you have little to no credit, how can you invest?
Well, there’s a few options.
3 Ways to Invest in Real Estate With Little to No Credit
1. Utilize a different type of capital.
You don’t necessarily have to use traditional financing. For example, years ago, credit cards were issued for people to buy primarily consumer goods, but I was using them to purchase and fix up properties. Then, banks would give me a business line of credit much more easily than a mortgage. So, guess what I was using my business line for? Purchasing and fixing up properties.
Another example is using OPM (Other People’s Money) to invest. By using private money, you’re not using your credit to do deals and you’re limiting your overall risk.
2. Use someone else’s credit.
This can be done in a few ways.
By this, I mean that I’ve joint ventured with people on properties, where we were able to use their credit or status to acquire the real estate. Once, my sister-in-law bought a property with my wife, where we were able to use my sister-in-law’s FHA eligibility. On another deal, I’m using my son’s ability to purchase a home through a joint venture since I have too many units in the eyes of the bank and he doesn’t. After all, it’s about trying to build the family’s overall wealth.
A different example is that of my buddy, who was buying a lot of commercial real estate. Since he previously had a failed business, he used a joint venture partner’s credit to get the loans. But he handled all of the acquisitions, fix-ups, and day-to-day management of the student housing he was buying. He still owned a nice percentage of the entities, but none of the loans were in his name.
3. Invest in another way.
Sometimes, we can just invest without needing credit. This can often be done when we take control of an investment without it being in our name. A perfect example of this is the “sandwich lease option,” where you lease a property from an owner then turn around and sublease it to someone else. Now you’re getting a security deposit and a monthly cash flow on a property you don’t even own.
Another way to invest without needing credit is in “subject-to” deals. This time you’re taking title to the real estate with the existing loan remaining in place, and the beauty of this is that it’s not attached to your credit. What’s cooler than having ownership and control and not using your credit?
Cash Flow Investments That Don’t Require Credit
There are some other investments as well that give off cash flow without requiring credit.
The easy one to think of here is notes. The one beautiful thing about buying or investing in a note is that you just need the money. So, whether you’re just starting out with a small amount of money (e.g. $25), using a platform like Lending Club, or you’re purchasing a secured first or second mortgage, you don’t need credit to do so.
Another one is tax liens. When you go to buy a tax lien, they don’t check it either.
A third way is hard money. If you’re lending out money to fellow real estate investors for their rehab deals, I can’t picture the borrower asking to see your credit.
As you can see, there are many ways to invest in real estate without using one’s own personal credit.
So, what are some of your favorite ways?
Let me know with a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.