In order to be a successful real estate investor – at least in the beginning stages – most people need access to outside capital in order to finance deals. While this isn’t a problem for many investors, it can be a point of contention for those with bad credit. If you fall into this latter category, do you know your options?
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Exploring Your Investment Options
Unfortunately, bad credit affects multiple areas of your life. In addition to hurting your chances of obtaining something like a car loan, it can also hold you back from getting the funds you need to invest in real estate in your professional life.
Thankfully, bad credit doesn’t have to be a death sentence. While it’s certainly not ideal, real estate investing could still be in your future – you’ll just have to go about it differently. Here are a few options:
1. Credit Repair
The first thing you need to do is look into repairing your credit. While you’ll have trouble removing accurate negative marks on your credit report, it’s entirely possible that there are errors on your report that are dragging you down. In fact, research from the Federal Trade Commission shows that 1 in 5 Americans has a mistake on their report.
If you don’t have the time to fix your own credit report, you can hire a service to identify and correct errors for you. A reputable credit repair company will analyze your situation and assist you in getting back on the right path.
2. Seller Financing
Until you get your credit situation cleaned up (it could take months or years), you’ll have to pursue alternative options for financing real estate deals. One popular method is seller financing.
“Seller financing is just what it sounds like: the seller provides the financing,” Brandon Turner explains. “In other words, the owner of the property acts as the bank, and although legal ownership [changes] hands, the payment is sent directly to the previous owner rather than a bank.”
The benefit of using seller financing is that the seller might not be quite as strict with their vetting efforts and may be willing to work with you even if you have bad credit.
3. Hard Money Loans
While seller financing obviously requires the participation of the seller, hard money loans allow you to invest in a piece of real estate without asking the seller to jump through any hoops.
With a hard money loan, a private lender offers up the money you need to purchase a piece of property, and you repay the lender at a rate they determine. Again, your credit history doesn’t have to factor into this.
Finally, you might look into wholesaling. It’s a quick, no-money-down, real estate investing method, which a lot of people have used to get started when they have little cash and/or bad credit.
With wholesaling, you find a house that someone is looking to unload – likely one that needs repairs – and you enter into a contract with the seller that gives you the option of assigning the deal to someone else. You then find someone who wants to buy the house for more than the original contract, and you collect the difference as a fee for your services.
Don’t Let Bad Credit Hold You Back
Life is certainly easier for those with good credit, but you don’t have to sit on the sidelines and watch everyone else succeed just because your credit is less than stellar. For starters, you need to be proactive and look for opportunities to improve your credit. Secondly, you must be willing to get creative and explore your options on the investment side of things. While a traditional bank loan may be the most convenient route to owning a piece of real estate, who says other methods don’t work just as well in the long run?
Has credit stood in your way in the past? How have you dealt with it? Let me know in the comments below!