If I have bad credit, how do I start investing now?

20 Replies

How do I get started with bad credit?  Do I need to wait until I improve my credit score before I can start?   I've heard about getting owner financing and lease to own, are these the only ways to get a start?

Hi @Neil Dyer and welcome to BiggerPockets!

You don't need credit to become an effective real estate investor: You just need the ability to identify (or structuregreat deals!

If you had perfect credit, you'd be no better off than you are right now if you still didn't know what a good deal looked like. Actually, you'd be worse off, because you'd probably be tempted to go into debt for some horrible "deal" that would likely bankrupt you!

So, no, don't focus on credit or cash or financing. None of that matters until you find a legit deal.

Start now talking to sellers and learning how to solve their specific problems with real-estate-based solutions that can actually make you money.

I appreciate your response Mitch.  So the concept is to find sellers that have specific problems that I could solve for them by structuring the deal that could work for both of us. Could you give me a couple examples of a deal structure you are talking about?  I'm not so familiar with these types of deals.  A couple examples would be very helpful.   

@Neil Dyer the reality is bad credit requires more cash. Go to a local lender and talk about your credit and set some goals to improve it. The cost of financing might be high but you can probably get a loan or improve your position to get financing later. Sound real estate investing comes quicker while using financing as a tool, not a crutch.

Good luck!

I guess it depends on how you were planning on financing your investing activities. As a HML, I agree with Corey. If you came to me with a bad credit score (meaning < 600 Mid FICO) I would almost certainly only be able to lend you a considerably smaller percentage of LTV on a bridge loan for that amazing property you have under contract than if you had more credit. Further if you wanted to refi say long term with us, we need 650+.

One of my colleagues last week had a client who repaired her credit by 60 points in 3 days. We know because we hard-pulled her score before and after at her insistence. I don't know how she did it, possibly it involved threats of phoning whoever 12 times a day or perhaps hiring some guy called Vito (not sure which is worse), but apparently it can be done and she is now eligible for the refi.

Hey Neil, we're in the same boat but, I think Mitch just gave us a nugget to run with. I just got off the phone with a seller I wanted to help and found out that the numbers I had ran on the seller's home was right with what the seller had in mind. Wow! I'm definitely calling more sellers. Have you made any calls yet. Btw, thanks Mitch!

Hey @Leon Collins , welcome to BiggerPockets!

I'm glad my suggestion helped! Yes, solving seller problems while making a profit is an investor's main reason for being.

One more piece of advice: I recommend you tag the BP member you're referring to in your response. I post a bunch here and the only easy way I'll know someone is talking directly to me is when I see it on my notifications page. 

Tagging a member is easy (as long as you're on a PC and not the phone app). Just type "@?" and up will pop up a menu list of every participant in the current thread. Select the user you want and their BP handle will populate in the post.

Lastly, your Dr. Seuss reference earned you a vote! I actually did laugh out loud!

Learn how to find or create a good/great deal. That's the number one skill you need. But, I do believe you need to repair your credit. It's an important snapshot of your financial history that you want to look it's best. Good luck 👍.

Clint

@Neil Dyer Please see my response to @Leon Collins about member tagging. I just happened to swing by this thread and noticed your question to me.

Here's an example of a deal that requires ZERO credit on your part. Let's say you start talking to sellers and come across a couple who have inherited investment property. In your conversation with them, you discover that the property (let's say it's a duplex) is vacant and in need of work. The owners don't want to be landlords and are ready to sell at a discount.

You might then call an experienced wholesaler who operates in your area and arrange a 50/50 joint-venture with them: You'll bring your duplex lead and they'll handle selling the deal to an investor. When all is said and done, you could make $5K as your share. You're now a professional real estate investor: No credit needed!

For the record, I'm doing this very deal as we speak. Fingers crossed, we close on Friday.

If you have bad credit then the first thing you need to do is invest in yourself and at least build up to having decent credit (650+).

In the long run you will be much better off. 

@Mitch Messer, Man, thank you for sharing that. I wrote notes, because I had just called a seller and didn't even think to offer that idea; a 50/50 joint venture, man I need mo' details on that. 

Fingers & TOES crossed! 

You got that, bro!!

Originally posted by @Leon Collins :

Ben. Can I call you Ben? Can you explain a bridge loan for my newbiness? And please ask that client to give you Vito's contact info!! Thanks man.

Leon, a Bridge Loan is basically a short term loan. In Real Estate it enables you to do what is needed in the short term such as purchase a property and or Rehab it and or flip it etc... The loan bridges your current needs until you can do what you need to do to pay off the loan. This is called an Exit Strategy.  Typical exit strategies include selling the property or refinancing to another lower cost loan. 

Hard Money Loans (the word Hard means the loan is backed by Hard assets - usually property) are usually bridge loans but have variants like Fix and Flip loans. 

Hard money bridge loans attract high interest rates and other costs. They are typically used to purchase investment housing when a) your income does not qualify you for a conventional loan b) the conventional lenders take too long to close for your deal and c) when you need rehab money added to the loan to rehab the property. There are other uses as well.

Usually the idea is to do what you need to do with the bridge loan money as fast as possible and then exit the loan.

Hope this helps.

I would definitely read up on the many different ways you can start repairing your credit. First, make all your accounts current and reduce how much of your credit limit you are using. You can bump up credit in a matter of months. Then, Call or write your creditors that you may have any late payments with and ask for a 'goodwill adjustment'. They may be willing to clear these delinquencies which account for 35% of your score. 

It takes some discipline and time but its doable. In the mean time FHA loans are great options for people with low credit. 580 will get you a loan. Best of luck!

Clint

@Lencoler Smith In my example, the agreement is between the person who found the deal (let's say that's you) and an experienced wholesaler (like me) who can turn that deal into fast cash by selling it to an investor.

I rarely sign an actual JV agreement, because I know I'm going to hold up my end of the arrangement. That said, your best protection is to only work with reputable wholesalers, ideally ones who have done deals like this before. Check with their past joint-venture partners to confirm everything went down as agreed.

Even if you signed an agreement with an unscrupulous wholesaler, you'd have little legal recourse if they did do an end run direct to the seller. No attorney would take that case...

If that were to happen, though, your best course of action would be to blast them right here on BiggerPockets to forewarn others!

Originally posted by @Neil Dyer :

How do I get started with bad credit?  Do I need to wait until I improve my credit score before I can start?   I've heard about getting owner financing and lease to own, are these the only ways to get a start?

It depends on why your credit is bad. If you have a high credit card balance to credit limit ratio, I would fix that before you invest. If you have collection acts, if you pay them off your credit will increase immediately. If you have bad credit because of past late payments, just change your behavior and you can invest. If you don’t pay attention to your finances don’t invest until you learn to be intentional with your money.

Craig: I had the naive impression that the court system would hold the banks accountable on the fraudulent transfer instruments on my mortgage with know robo signers and known foreclosure mill law firm documents.  I was wrong and got my house stolen and my credit ruined.  I was naive and gullible when someone convinced me that I had remedy as a victim of mortgage fraud.  I was unaware of how corrupt the court system is and was in favor of the banks.  Sometimes bad credit isn't for the reasons you imply.