This is my first post here. I'm excited to be apart of this community of knowledgeable individuals. Because of medical reasons I was forced to file bankruptcy to get rid of my medical bills in collections that was ruining my credit. What would be the best way to start investing in real estate with this public record on my background? Will this prevent me from investing right away? My goal is to have at least a four unit by next summer.
@Dominique McDonald how long ago did you file bankruptcy? Chapter 7?
@Justin Kay I filed in May. It was discharged in August.
@Dominique McDonald Obviously the most challenging issue you have is financing. The most common post-bankruptcy financing route people go are FHA approved mortgages. You can qualify for them 2 years after filing bankruptcy (1 year if you can claim an "exception" although it is fairly rare). There are some other financing options, but honestly the terms are typically not good (high interest rates and short term balloons), unless you can get a good cosigner.
I'd focus more on investment options that don't involve direct ownership of RE for the time being. I think you need to let your credit rebuild a little before you go for an FHA mortgage. Then let 7 years pass before you go for a traditional.
@Justin Kay Would bankruptcy affect me using a hard money lender?
@Dominique McDonald Most likely yes. It is a possibility with hard money loans though. It depends on the lender, the property you're looking to pick up, and a number of other factors. But honestly, I wouldn't even think about it.
Two months post-discharge is a very short time period. A hard money lender will likely use that against you, and present some significant interest charges (if not loan origination fees and other expenses). It'll be much harder to cash flow a property with 15%+ interest rates. If you filed a Chapter 7 you had to pass the Means Test, which means you probably didn't have a 6 figure regular job, so being able to pay for repairs with high interest rate loans in a non-cash flowing property will be difficult. You'll need to find a pretty good deal with significant built in equity in order for it to work. But if it doesn't, you're stuck with the judgment (you have to wait 8 more years to file another bankruptcy, if you need to). It's high risk for everyone, both you and the lender.
How much do you have saved up for a down payment?
@Justin Kay Right now, about 5 grand.
@Dominique McDonald if you saved that up post-filing, congratulations! If you were able to save it through a wild-card exemption filing through bankruptcy you're one of the lucky ones.
If you keep saving, you should have enough to apply toward a FHA loan in a year and a half-ish. In the meantime, look at some other real estate investing options that don't involve direct ownership, including REITs.
Feel free to try some hard money lenders, but I don't think that's enough of a down payment to be able to give a hard money lender sufficient cushion and comfort, especially 2 months post discharge. But if you find the right property and the right lender, it's possible. Keep trying, and don't say no for an answer. Just make sure you run the numbers very conservatively, and you pay special attention to the fees and interest rates being charged. I've seen dozens of people post-bankruptcy get taken advantage of.
I agree with everything @Justin Kay said...but you can also get creative and think outside the box.
If you have bad credit, partner with someone who has good credit, and agree on terms. You both bring $5k to the table, you split all the costs, they get the financing and you do the majority of the leg work etc. then split the profits.
Where there is a will, there is a way. Good Luck!
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