Having a low credit score can hurt you in a multitude of ways. It can affect that rates you get on credit cards and the terms of a loan that you will get when buying a car. It will also make getting a loan on a home more difficult, as banks place more stringent stipulations on people with very low credit scores.
Don’t be fooled though, you have to have an extremely low score for a bank not to loan you money (if you have the income to support the loan). Besides that, there are so many ways that you can invest in real estate outside of using a traditional lender. So, getting started now should be more important than fixing your credit score.
As a bonus, when you start investing, you will see your score start to rise.
With that said, here are a few ways that you can get started in real estate investing with a very low credit score.
How to Invest in Real Estate With Bad Credit
Wholesaling is one of the most popular ways to break into real estate investing—and for good reason. Through wholesaling, you will learn many of the skills that are needed to be a successful investor for years to come.
So, what is wholesaling exactly?
Wholesaling is the act of finding someone who needs to sell their house and getting it under contract for a price well below value. You then take that contract to a real estate investor in your circle of contacts and sell it to them for a slightly higher price than you paid. You keep the difference—it’s that simple.
With wholesaling, you don’t need any credit at all, because you never take possession of the property. Therefore, you never even have your credit checked.
The perks of this strategy are many. But importantly for those with bad credit, you aren’t investing money as much as you are investing the time, discipline, and energy that it takes to not only find good deals but also find people who are interested in buying those good deals from you.
There are a lot of people/companies out there who make a very good living from wholesaling homes. However, it is more of a job than investing in my opinion.
2. Hard Money
This is probably one of the easiest ways to secure money for a property that you are looking to invest in. With ease comes a hefty price tag on the money that you will borrow though.
Typically, you are looking at between 10 and 15 percent annual interest, which you will pay monthly interest-only payments on. You’ll also pay anywhere between one to three points to close on the loan.
Hard money loans are easier to get than standard bank loans when you have low credit scores, because they are less concerned with your credit than they are with the actual property that you are looking to get lending on.
Similar to how private money works (you’ll learn more below), the hard money lender wants to know that if you default on your payments, they will be able to take the house from you and turn a profit on it. This is in contrast to a traditional bank, which doesn’t want anything to do with real estate.
There are so many hard money lenders out there. By simply doing a Google search, you can find hundreds in minutes. With most, you can get started on the lending process by simply going to their website and filling in the information of the property that you are looking to finance.
Another great thing about hard money, as well as private, is that these places aren’t going to loan you money unless they think that you are going to be able to make money. They WANT you to pay them back—not just once, many times. Best case scenario, all will go well and then you’ll hopefully return to them for more money next time you have a deal.
3. Private Money
Private money can be anyone from a family member to a friend to someone you just met last night at an REIA (Real Estate Investors Association) meeting. These types of loans are great for fix and flippers or people trying to do a BRRRR (Buy Rehab Rent Refinance Repeat) deal.
Typically, this sort of lender will care less about your credit score and much more about the asset (the house) that you are purchasing. I have found that private money lenders even like to walk the house and see exactly what is going to need to be done in order to sell it. They take this more seriously than a bank does due to their being less stringent on credit.
You are going to pay interest only on the money that you are loaned until you pay back the loan amount in full at the end of the set term. Usually this amounts to 1 percent of the loan amount, ranging from three to 13 months (although I have seen as high as three years).
Here is an example of how that works:
Let’s say you need to borrow $80,000 for the next six months to get your house fixed up and rented out. You are going to pay $800 per month over the next six months ($800 x 6 = $4,800).
So, at the end of six months, you will have paid $4,800 from your interest-only payment. And then you will have to pay back that $80,000.
You will have paid $84,800 total at the end of six months to be able to finance the deal that you just got done.
4. Get a Partner (With Good Credit)
There are basically three things that you need in order to be successful as a real estate investor. You need hustle, money, and knowledge. The great thing is that you don’t need all three.
This is wherein lies the opportunity to bring in a partner. If you can find someone who is willing to put up the money, you can go out there and hunt for deals and get them under contract. This partner will put up the money for the purchase and rehab (if necessary), and you will take care of everything else.
It will be up to you to figure out how to structure these deals, depending on your relationship to the person in question.
Related: How to Build Credit From Scratch
It Hurts—But a Low Credit Score Won’t Kill Your Investing Career
As you can see, having a low credit score shouldn’t stop you from pursuing investing as a side hustle, hobby, or full-fledged career. The most important thing you can do is get out there and find some deals! (If you are interested in how to go about it, check out my previous post on the top 11 ways to find deals.)
Once you find them, securing the money is one of the easier steps.
Questions about financing deals without stellar credit?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.