How to Invest in Real Estate with Bad Credit

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If your credit score is less than stellar, you’re not automatically disqualified from investing in real estate. Sure, you might have to get creative and figure out how to get funding, but it is possible! I’ve talked to plenty of investors who were able to get started, even with obstacles like bad credit and no money.

Here are a few ways you can purchase your first rental:

Private money. Private money refers to any money that you borrow from a non-bank on your own terms. This could be money you borrow from a friend, relative, or another investor. Private money is a fantastic way to get started, because typically a savvy investor will care more about the deal than your personal credit score.

Seller financing. If your credit score is holding you back from applying for a traditional mortgage, seller financing might be a great option for you. Unlike a big name bank, a seller can negotiate terms. It’s a great opportunity for the buyer to invest with no money down or a low credit score. Head over to the podcast to hear more about seller financing!

Hard money lenders. Hard money lenders are like bankers, but they set their own rules. They lend money with less strict standards than the banks because they are not regulated by the government. They don't care as much about your credit score and they don't limit you to one investment at a time. They lend on the merit of the deal and they can close funding much faster than a traditional bank. One drawback to hard money is that it typically has a higher interest rate.

401k loan. If your employer offers a 401k plan, you might be in luck! Since your 401k is your money, you can take a loan from it. There are a few limits, but your credit score isn’t one of them! This is a strategy I use yearly. It's a fantastic strategy, because you’re in essence, paying the interest back to yourself. You can learn more about this strategy here.

It’s worth mentioning that this is not an exhaustive list. I truly believe that if you want to invest in real estate, you can make it happen! If you feel like these options won’t work for your individual situation, check out our podcast episode about paying off debt, as well as this post on creatively financing your real estate deals!

 If your credit score is less than stellar, you’re not automatically disqualified from investing in real estate. Here are a few ways you can purchase your first rental.

Should You Go Into Debt to Purchase Real Estate?

Let's talk about debt. We get questions all the time about whether or not you should take on debt in order to purchase rental real estate. The real answer is: maybe. 

One mantra that has stuck with me throughout the years is the idea that “free and clear is the promised land.” Obviously, if you can purchase a property without a financial product, you forego interest rates, fees, and other expenses.

However, using cash up front for every single deal isn’t always an option. You've heard it here before: finances are not one-size-fits all. Luckily, there are many alternatives if you’re willing to be creative. And there are ways to pay with cash, even if you don’t have $50,000 sitting in a savings account.

You can take a 401k loan, take out a HELOC, partner with other investors, or structure private notes. Wholesaling is another great option. Business credit cards may be available to you. Traditional mortgages, or refinances are options as well.

It all comes down to evaluating these products, as well as taking inventory of your current debt situation. You have to assess financial products, and determine if they are worth it to help you meet your goals. Natali likens it to shopping for apples. Natali likens it to shopping for apples. If you're looking for a piece of fruit, you would try to get the best product for the best price. Financial products are no different.

Remember, interest is paying money for money, so you want to get the best deal possible. Simply think of these loans as products, and decide if it works for your individual situation. It's not right or wrong to utilize debt to reach your goals, just make sure you're empowered in your knowledge about financial products, and make the best decision possible for you and your family.  

 Let's talk about debt. We get questions all the time about whether or not you should take on debt in order to purchase rental real estate. The real answer is...

How to Determine Your Payoff Schedule for Real Estate Investments

Many investors have asked us about the most effective way to pay off rental properties quickly. However, I think that sometimes investors get ahead of themselves. Before you determine how to accelerate your loan payoff, you should decide if it’s the right option for you to do so.

In order to determine if you should accelerate your payoff date, there are four key areas you should consider. There is no one-size fits-all when it comes to finances, so you’ll need to survey the options, and how they will work for your individual situation.

  1. Do you have other investment opportunities? It’s fine to pay down your mortgage if you don’t have any opportunities available to you at the time. But if a great deal comes across your desk, you may want to take the cash flow from your tenant to purchase an additional rental property. 
  2. What is your tolerance for debt? If you’re in a Dave Ramsey mindset, you’ll probably be focused on paying off your debt as quickly as possible. On the other hand, if you’re interested in using leverage to grow your portfolio, paying off the loan can wait. 
  3. What is your time horizon? Your investment strategy will likely be different when you’re 30 versus when you’re 60 years old. However, it’s not all about age, it’s more so about mindset. It all depends on how quickly you want your properties to cash flow.
  4. What is your required monthly income? If you’re at a time in your life where you’re using your rental income just to make ends meet, you should probably keep your cash flow. If your rental income is just icing on the cake, you might be more inclined to put it toward paying off debt.
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 In order to determine if you should accelerate your payoff date, there are four key areas you should consider. There is no one-size fits-all when it comes to finances, so you’ll need to survey the options, and how they will work for your individual situation.

Evaluating What You Own Vs. What You Owe

Leveraging means taking what you own, and using it as collateral to make further purchases. In real estate, leveraging is how successful investors are able to quickly and effectively grow massive portfolios. 

If you've seen our video on the BRRRR Method, you know how powerful this strategy can be! But it rarely just falls into place, it's something you should strategically plan. You never want to be over leveraged or acquire crushing debt.

In order to leverage well, it’s imperative that you know where you stand. The first thing you should do is assess all of your liabilities. This includes all of your debts. Include the remaining balance on your mortgage and car loans, any credit card debt, a HELOC, etc.

Then determine what your assets are, and how much they are worth. Include your real estate investments, cash accounts, stocks, and 401k. Other assets could be college savings accounts, vehicles you own, and art. Include anything that is cash, or could be sold for cash.

The next step is to subtract your total assets from your total liabilities to calculate your total net worth. In our family, this is something we do often to ensure we are on track to meeting our goals.

Personally, we follow the advice of Natali’s dad, who recommends that you should own up to 30% of your portfolio, and be no more leveraged than 60-70%. To hear more about how we balance assets vs. liabilities, check out episode 106 of Investing in Real Estate! 

 Leveraging means taking what you own, and using it as collateral to make further purchases. In real estate, leveraging is how successful investors are able to quickly and effectively grow massive portfolios. But you've got to know your net worth to do this effectively.

Should You Pay Off Debt or Invest in Real Estate?

Should you pay off debt before you begin investing in real estate? Is being debt-free a requirement for investing? This topic is one of our most frequently asked questions, understandably.

Debt can be overwhelming, but the prospect of creating passive income is enticing! Many people understand the value of real estate investing, but are concerned about approaching investing when weighed down by debt. How can you choose what is right for you?

Deciding how to approach real estate investing when you have debt is not always simple and straightforward. There are a few factors to consider. This is a decision you’ll have to make for yourself, but we want to help you weigh your options.

The first thing you should do is write down all of your debts, so you have a clear picture of where you stand. Assess the kind of debt, as well as the interest rate for each. Then calculate how much money you have each month to allocate toward paying off debt. 

Sometimes, debt is necessary. Perhaps you had to take out a loan to buy a car, or maybe you have some student loan debt. Typically, anything under 4% interest is not a priority to pay off immediately.

For us, all of our real estate investments accrue a minimum of 10-12% return on investment. It's all about determining which rates are higher. For example, if you have a store credit card with 22% interest, you will likely want to consider paying that off as quickly as possible. 

Next, weigh what you’re paying monthly in interest against a potential investment. For example, if you have $500 each month to allocate either toward paying off debt or investing, you’ll have to assess how quickly that $500 can help you reach your goals.

You should also consider that it’s not an all-or-nothing approach! You can split the money up and approach the situation creatively. Investing is not black and white, it’s about what finding what works for you and benefits your specific situation.

Want to know more about turnkey real estate investing? Book a free, no obligations call with our team! Just pick a 30-minute slot that works with your schedule, and we'll talk about how rental real estate can help you reach your goals. 

 Debt can be overwhelming, but the prospect of creating passive income is enticing! Many people understand the value of real estate investing, but are concerned about approaching investing when weighed down by debt. How can you choose what is right for you?

How to Evaluate Debt Service on a Rental Property

One common question we keep getting, especially after our video last week, is, “How do I maintain positive cash flow if I have to pay back my loans? 

If you have to take out a loan, you should figure out if it makes sense financially. If you have to accrue debt, is it a good investment?

So I thought I would take this opportunity to thoroughly discuss how to evaluate debt service on a property.

The first thing you need to examine is your loan. Comprehensively examine the following points:

  • How much money are you borrowing?
  • How long will you be borrowing?
  • What happens at then end of the term?
  • What interest rate are you agreeing to?
  • Is there a pre-payment penalty?

Next, you’ll want to calculate how much rent the property can bring in every month. There are a couple ways to find out the amount of profit. If you’re working with a turnkey provider, they should be able to give you an exact amount.

 If you have to take out a loan to buy rental property, you should figure out if it makes sense financially. If you have to accrue debt, is it a good investment?

But if you’re doing it yourself, you might have to settle with an estimate. I like websites like Rentometer. All you have to do is put in an address or zip code, and it will give you a range. This range is based on the rent in other properties in the neighborhood. This might not be 100% accurate, but it’s a good place to start. When calculating your debt service, I would choose the lowest number in the range, just to be conservative.

Then, you’ll need to account for all of the expenses of your property, things like insurance, taxes, and a property management fee. For our properties, we like to take out 40%. Again, this is a conservative figure, but I’d rather come out pleasantly surprised than empty handed. You can learn more about our ROI formula here.

Now you’ll put all of these factors together to determine if the property will be profitable with your debt in place. You can use the website Bankrate or any amortized loan calculator. We like to use an excel spreadsheet that we’ve put together. You can download the free spreadsheet here.   

In Gary Keller's book, The Millionaire Real Estate Investor, he posits if you can make $1 above your loan amount, it's a sound investment. However, I like to aim toward a profit of at least $100. Keep in mind that over time, you'll be able to pay off your debt service, and then you'll have a larger profit.

Top Ten Podcast Episodes of 2016

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This year we launched our podcast, Investing in Real Estate. We’ve hosted a lot of knowledgable guests, and answered many of your thoughtful questions. The show was even featured on iTunes' New and Noteworthy page! We’ve had so much fun putting this show together for you. Thank you so much to everyone who has listened, and left us a kind rating or review.

And if you’re new here, we’ve got a great archive of shows for you to go back and listen to! We’ve compiled a list of our top ten most listened to episodes of 2016!

1)   EP009: What to Look for in a Rental Market
If you’re ready to make the jump into real estate investing, you might be wondering where to find your first property. There are certain qualities and characteristics that make a great rental market, such as crime data, vacancy rates, and jobs. This episode is for you if you’ve ever wondered how to assess a market.

2)   EP010: How to Set up Profit First for Real Estate Investing – Interview with Mike Michalowicz
Finances are an integral part of running a real estate business. Figuring out how to properly and effectively structure your finances can be confusing, but Mike Michalowicz has created a system to help make your business profitable! Listen to this episode to hear Mike’s simple and effective formula to help you earn more profit.

3)   EP075: Tom Wheelwright is Back for an Election Tax Special
We recorded this episode just before the 2016 presidential election. Tom Wheelwright, tax genius, made his third appearance on the show to talk about the implications of each candidate and their policies regarding the tax code.

 The top 10 Investing in Real Estate podcast episodes of 2016. 

4)   EP008: How a New Dad Started Buying Real Estate [Case Study]
If you’re a hands-on person who is intimidated by the idea of passive income and buy and hold real estate, you won’t want to miss this example of a new investor who decided to take the plunge and buy his first property!

5)   EP042: The Best Way to Buy Rental Properties with No Money
Don’t have money for a down payment? Does your credit score hold you back from applying for a traditional bank loan? No problem, there’s another way! This episode is all about seller financing and creatively structuring a real estate deal.

6)   EP007: How Brandon Turner from BiggerPockets Bought his 50th Rental Property
On this episode, I interviewed Brandon Turner on how he got started in real estate, the criteria he looks for in a property, and different financing options. Brandon has a lot of insight and experience about real estate investing; you’ll want to hear his story!

7)   EP077: What is Self-Storage Investing? – Interview with Scott Meyers
Isn’t self-storage investing fascinating? Think about it: you purchase a lot of facilities, and reap all the benefits of a real estate investing without the hassles of tenants and toilets! Scott Meyers is an expert on this subject, and if you’ve ever wanted to get your feet wet in the self-storage industry, you won’t want to miss out on his perspective.

8)   EP044: How to Build a Billion Dollar Real Estate Portfolio – Interview with Alan Guinn
What would it feel like to land a deal nearing a billion dollars? Just ask Alan Guinn, he’s a successful investor who learned to let go of the fear of failure and exponentially grow his real estate portfolio!

9)   EP076: When to Start Outsourcing Your Real Estate Business
It can be incredibly difficult to relinquish control in your business, but if you’re interested in making your real estate venture a scalable, passive-income machine, you’ll have to outsource. On this episode, Natali and I talked about knowing when to outsource, and how to make your business scalable.

10) EP043: Should I Pay Off Debt or Invest in Real Estate?
Is being debt-free a requirement for real estate investing? This is one of our most frequently asked questions! Natali and I sat down and weighed the options on episode 43.