One of the most common questions we receive is, “How can I invest in real estate with bad credit or a low credit score?” Before we dive into our answer, it’s worth mentioning that if you believe that your credit score defines you, I’d like to encourage you to challenge that limiting belief. The fact that your credit is bad, is just one small piece of your overall financial snapshot. It shouldn’t hold you back from achieving your investment goals.
Now that you have a little motivation after learning that your bad credit doesn’t have to stop you from realizing your real estate investment dream, let’s find out what strategies will make it a reality.
Try These 4 Strategies to Invest in Real Estate if You Have Bad Credit
It’s easy to let something like bad credit become a major roadblock while trying to invest in real estate. This especially holds true when you are being declined left and right when applying for traditional bank loans. Additionally, if you wait until your credit is perfect to start purchasing buy and hold real estate, it may never happen. Let’s face it, a lot of us have less than stellar credit. This causes some investors to say, “It’s now or never”. They then push forward with buying real estate anyway by utilizing strategies that are best for their situation. If you are one to push forward, this article will give you a few ideas on how to invest in real estate with bad credit, and can have you owning a cash-flowing rental property of your very own in no time!
Let’s take a look at these proven real estate investing strategies:
1. If You’re an Investor with a 401K and Bad Credit Then You’re in Luck
Borrowing against your 401k is a strategy used by many investors with bad credit to build their portfolio, as well as put their 401k to good use. You may be saying, “wait a minute, we’re not supposed to touch our 401k. It’s our retirement nest egg”. This is what we have been taught since we were kids. You get a good job, you’re provided with a 401k, and it’s your ultimate retirement plan”. But what most don’t realize, is that it can actually be a terrible plan to only rely on your 401k to get you through retirement.
To make you feel more comfortable borrowing against your 401k, let’s go over a few things:
Your 401k is Not an Ultimate Retirement Plan
Whether you have bad credit or not, using a 401k loan to purchase buy and hold real estate is actually a smart strategy that is utilized by seasoned investors. Taking out a 401k loan to invest in real estate can make it possible to build up your retirement funds way beyond what a stand-alone 401k can.
Keeping your 401k funds, as is, will severely limit you. This makes taking out a 401k loan when you have bad credit a good option because it’s actually a smart wealth building strategy in the first place. Here are two points that make taking out a 401k loan an attractive option for those with bad credit:
401k Contributions are Capped
The government only allows for a max contribution of $19,500 per year. Why be limited when you can borrow against your 401K to invest in other avenues, such as real estate? That will greatly increase your retirement funds and makes much more sense.
Your Funds are Subjected to Stock Market Crashes
Remember the stock market crash of 2008, where so many people lost their life’s savings; this can happen again. 401k funds are at the mercy of the stock market, but real estate typically isn’t – everyone needs a place to live no matter what’s going on in the economy.
So now that you see that it’s ok to touch your 401k, and that it’s actually a smart thing to do, here is how you can take out a 401k loan when you have bad credit. Log into your 401k website account, request a loan, and have the loan amount transferred to your bank account. It’s pretty simple. If you want all the fine details, you can simply call a representative to explain how the repayment terms work, interest rates, and so on.
The good news is, using a 401k to invest in real estate with bad credit will actually increase your 401k balance. This is because the interest you are being charged during the course of the loan is actually being paid back to your 401k balance. Overall, it’s really a great strategy for being able to buy rental real estate when you have bad credit.
Watch this video with Clayton Morris to see exactly how you can purchase buy and hold properties with your 401k:
2. Seller Financing is a Great Option if Traditional Lenders Won’t Approve a Loan Because of Bad Credit
Once you realize that your credit score or overall bad debt is preventing you from obtaining a loan from a traditional lender, a smart alternative is seller financing. It may even be a better option for those who have good credit. It’s a powerful strategy that gives both the seller and buyer more options and the ability to make their own terms. Most owner financing deals won’t bother with your credit score. This is what makes it desirable to those with too much debt, bad credit, and the like.
What is Seller Financing in Real Estate?
Seller or owner financing is a real estate arrangement in which the seller accepts installment agreements from the buyer for the purchase of their house, basically taking on the role of the lender. The owner extends credit to the buyer over an extended period of time. The buyer and the seller typically sign a promissory note that lays out the terms of the loan. Most seller financing deals are set up so that the buyer pays a down payment, as well as interest on the loan. In some cases, the interest is higher than a traditional bank loan. It all really comes down to the negotiations between the seller and buyer.
Arm Yourself by Knowing How the Owner Benefits From a Seller Financed Deal
If you are going to invest in real estate with bad credit, and utilize this strategy in the process, you will want to know the advantages of seller financing for the owner. It would be wise to arm yourself with these benefits because in some cases, you will need to present the idea of seller financing to an owner. Many deals have been made this way when an owner was not even planning on using seller financing, and was not even aware that it existed.
- Sellers can avoid paying capital gains tax when not selling the house all at once. They can accomplish this by financing it out to a buyer. It’s much more lucrative to have cash flow than capital gains tax.
- Seller financing can allow the owner to sell on their terms. This may allow them to sell the house for more than they would have if they sold it the traditional way.
- They can retain more of their money by not having to pay a commission to a real estate agent.
- The seller can receive a lump sum down payment.
- Owners will be able to pass the tax liabilities of the home over to the buyer.
Advantages of Seller Financing for an Investor with Bad Credit
Most investors don’t even know selling financing exists, let along all the fantastic benefits that comes along with it, especially when you have bad credit. Here are a few that may be of interest to any real estate investor of buy and hold properties:
- A buyer who has bad credit, low income, unsteady employment, or a low credit score, might not even want to step into a bank! Seller financing is a great alternative that does not have the same tight approval process and rules. The terms are decided between the buyer and the seller, and normally do not include income verification or credit checks, but instead, a down payment, and often a promissory note to legalize the deal.
- Seller financed deals are relatively quick, which can provide the buyer with cash flow right away.
- Owner financing provides the opportunity to eventually close the deal paying less than you owe. For instance, a buyer may wait a certain amount of years, maybe when there is about, let’s say, $20,000 left to pay, and presents the owner with a deal. They may say something along the lines of, “I owe $20,000, and instead of spreading the payment out over the next five years, I’d like to offer you $10,000 today, and we close the deal. You may think that they will say no, but in reality, you have their attention because $10,000 is an attractive amount of money to have in your hands the very next day. Most buyers will say yes, and you just saved a bundle! This is certainly not possible with a traditional lender.
How do I find Seller Financing Deals?
Now that you are excited about the possibility of investing in real estate with bad credit utilizing seller financing, you might be wondering how you go about finding this type of situation. Although there are many ways, here are two to get you started:
Search the Classified Ads
Check your local paper, Craigslist, and the like, for seller/owner financing notices. Be sure to check consistently or even set up a search for online ads. This will allow you to be notified via email when anything under your search criteria pops up.
Mail Out a Letter of Intent to Property Owners
Obtain names and addresses from the county clerk’s office, maybe properties that have tax liens on them. Or, addresses from properties with for rent signs, and send out letters that detail your intent to buy the homeowner’s property. Explain how you would like to purchase their property with seller financing. You can detail how they will benefit, your down payment offer, and so on. You may just find someone who wants the house taken off their hands. Or, they are enticed by the thought of a cash down payment. They may also love the idea of not being responsible for property taxes any longer.
Learn more about this topic by listening to our podcast episode titled What is Seller Financing?
3. How to Buy Property with No Money Down and Bad Credit – Use Private Money
When it comes down to it, Aunt Jane, that family friend you have known for 30 years, or a fellow property investor, might be happy to loan you the money for a good real estate deal if it’s a win-win, all without even thinking about your credit score. These individuals would be labeled as private lenders.
A private money lender is a non-bank or non-institutional lender. They are typically individuals that either wants to help an investor out, or are looking to get in on a good real estate deal, or both. The interest rate can vary depending upon who you are dealing with – a family member, friend, or private investor.
Using a private money lender is a great way to bypass a traditional loan provider that will make you jump through hoops to apply, only to decline your real estate loan when the bad credit scores pop up.
Real estate investors with bad credit can get the funds from a private money lender if they know how to find them, along with ensuring they understand how to compensate the lender so it’s worth it to them.
What Steps Do I Take to Find Private Money When I Have Bad Credit?
- Think about everyone you know who may have money and make a list.
- Prepare a script so that you can easily talk to each possible money lender. This will prevent you from forgetting what to say or getting off-track. You can utilize Clayton Morris’s private money phone script to get the ball rolling.
- Call each person on the list, making notes as to their interest or disinterest. The purpose of this phone call is to qualify them. You don’t even need a property lined up yet.
- For those that are a definite “no”, ask if they know anyone who might be interested.
- If they seem interested, ask to get together for coffee or lunch to discuss the opportunity further. This will give you a chance to try and seal the deal, as well as enjoy a latte.
A Few Ways to Compensate a Private Money Lender
Understanding how to compensate a private money lender can be the key to successfully sealing the deal. With that in mind, let’s look at 3 ways this is done:
- Profit Split/Joint Venture: This compensation agreement is typically used by new investors. This is because half of the profit goes to the lender. Basically, you do all the work in getting the property together. The lender’s part is loaning you the money, and you both get 50 percent. It’s common for there to be “preferred interest”. This is when the lender gets paid first.
- Guaranteed Interest: This method of compensation is the most straightforward and common. Its normally set up so that the private lender is given a down payment, and the loan is paid back with a specific interest rate for a certain amount of time. The interest rate can vary depending on who you are dealing with.
- Compensate with Points: When dealing with private lenders, this method of compensation is not commonly used. But, when you’re trying to buy property with bad credit, and need to convince someone to lend you money, points sometimes will do the trick. A point is an upfront payment to the lender. Each point is a percentage of the loan amount. For example, a $100k loan, with an agreement of 1 point, will give the lender $1,000 upfront, along with interest paid over the life of the loan. This strategy can be used to sway a personal lender who is on the fence.
You may want to pick a copy of Getting the Money: The Simple System for Getting Private Money for Your Real Estate Deals, it contains great some great information that can assist you. Also, check out our series on private money.
watch this video to find out more about locating private money lenders and hear a live phone call that demonstrates what to say to them.
4. Hard Money Lenders for Real Estate Investors with Bad Credit
A hard money lender almost seems like a personal lender, but not quite. They run the deal more like a business, but are not regulated by government lending rules. There are a few things to consider when looking into a hard money loan, let’s see what they are:
Why Should You Consider a Hard Money Lender When You Have Poor Credit?
If you have bad credit, low credit scores, a bankruptcy, and the like, a hard money lender can offer you several opportunities or advantages you most likely will not get with a traditional bank lender.
They Look at the Value of the Property
Hard money lenders don’t always look at your credit score, income, or payment history. They are more interested in the value of the property. This is because if you were to default on the loan, they could legally take possession of the property. This will allow them to sell it to recover their costs, as well as make a profit. This is how the deal is structured and it creates a win-win situation because you get your loan with bad credit, and they make money no matter what.
Hard Money Lenders Can Offer Flexible Terms
Traditional bank loans are restricted to certain terms that most times, can’t be negotiated or altered. Hard money loans have flexible terms since they are not regulated by the government. Even with bad credit, you can still have some playing power to negotiate a few terms in your favor. The lenders treat each loan differently, giving both the lender and buyer a chance to customize the deal.
Faster Loan Processing Than Traditional Bank Loans
If you need to secure a property quickly, before another buyer grabs it, hard money lenders can have the deal processed pretty quickly, sometimes in a matter of days, depending on the circumstances. In contrast, traditional bank lenders can sometimes take months, especially when you’re a real estate investor with bad credit.
Disadvantages of Using a Hard Money Lender
With your low credit score, your options for obtaining a loan may be limited. With this in mind, a hard money lender is a great option to get around this obstacle. However, it may come with a price:
Hard Money Lenders Can Charge Higher Interest Rates
Knowing their clients are in a pinch, the lenders are capable of charging higher interest rates. Although not the ideal situation for an investor trying to maximize their profits, the ability to get the loan when they have bad credit normally outweighs this.
Lenders Can Charge Fees When Dealing with Investors with Bad Credit
Fees or points can sometimes be worked into the agreement by the lender. This can provide them with a lump sum of money upfront, making the deal worth their while. Lenders are capable of doing this because they know a real estate investor with bad credit may have limited options. Therefore, the buyer is more likely to agree to their terms.
Have More Control Even with Poor Credit by Being Prepared Before You Contact a Hard Money Lender
Although a lot of terms can sway in the hard money lender’s favor, there are a few things you can do to gain more control and come out on top, no matter how bad your credit is. Use whatever method you have for finding a hard money lender – word of mouth, or a simple Google search. Then, go into it as if you are qualifying them, as opposed to the other way around.
Have all your information ready. This can include how much equity is in the property and why it’s a good cash-flowing opportunity. You can also mention the renovations you plan to do that will increase the property value. Then, call around and tell each lender what you have to offer them and what percentage rate you are presenting, instead of having them tell you the terms upfront.
You might just find that they may not want to miss out on the opportunity, and they accept your offer. It can’t hurt to try. You could end up saving a bundle in doing so.
Some Tips on Improving Your Credit Score
If you are reading this post, most likely you can benefit from some advice on how to improve your situation. Here are a few things to keep in mind:
- Use MyFico to Monitor Your Credit: Utilize MyFico to keep tabs on your credit score and to ensure that the bad credit on your report is valid. You can easily use MyFico to create goals for removing unwanted items.
- Contact Fund&Grow to Raise your Score: Fund&Grow provides unsecured business credit cards to real estate investors with fair or good credit, but they can refer you to professionals that they work with who help fix errors on your credit report. If even just a few errors are found and removed, this can raise your score. Once your credit score is raised, you may qualify for an unsecured, low-interest business credit line. This can then be used to fund your next real estate deal.
- Paying off Student Loan Debt: Let’s face it, most people have student loans these days. If you are one of the lucky investors that has a massive student loan debt, then you are well aware of how this can lower your credit score. Read about how you can pay off your student loan in 2-years, getting you closer to your goal of a higher credit score.
Don’t Let Your Bad Credit Stop You from Investing in Real Estate!
Don’t let anything get in your way of investing in buy and hold properties, building up your real estate portfolio, or increasing your net worth. Bad credit is just one small factor that shouldn’t stop you from pursuing your dreams. There is always a way around, alternative investment strategies, and the like. We hope our tips for investing in real estate with bad credit will have you purchasing real estate sooner than you think.
Would you like to consult with someone who can advise you further on this topic? Or, maybe you are interested in having someone find cash-flowing properties for you? If so, schedule a free consultation with Morris Invest so you can speak with one of their experienced team members.
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