The views and opinions expressed in this article are those of the author only and are not endorsed by Credit.com. Credit.com does not provide, or endorse, any investment advice.
In 2022, virtually all asset classes saw their prices plummet, leaving investors with nowhere to hide. However, real estate offered some much-needed solace for some. According to Morningstar, investor confidence in real estate soared to unprecedented heights in 2022, and it’s easy to see why.
Between January 2020 and September 2022, the median sale price for existing and new homes in the U.S. rose more than 43% as rental prices increased 11%. Over the past year, home sellers enjoyed a 45% increase on their investment returns from 2020 and a 71% increase from 2019.
Unfortunately, one thing that may be restraining some investors from tapping into the benefits of real estate investments is debt. However, bad credit doesn’t necessarily bar investors from the real estate market.
There are some alternatives for ultra-savvy investors who know where to look for safe but lucrative investments. Of course, anyone who has ever even considered buying a home or vehicle knows how important credit scores are.
In fact, bad credit can prevent some people from purchasing a home for themselves. That’s because it’s virtually impossible to secure a traditional mortgage with a bad credit score, meaning anything below 620. In today’s interest-rate environment, even those with a credit score below 720 may not be able to afford a traditional mortgage because of the hefty interest payments.
However, buying a home for investment purposes is entirely different in the eyes of creditors. While it’s much easier to get a traditional home loan if you have good credit, investors have plenty of other options for investing in real estate.
1. A Hard Money Loan or Private Lender
For example, those intent on purchasing an investment property might consider getting a hard money loan instead of a traditional mortgage. Hard money loans are considered a last resort, and they’re only available to investors trying to fund an investment property. People who are trying to buy a home to live in can’t get a hard money loan.
Hard money lenders look far beyond someone’s credit score and typically provide funds fast. Most of the time, hard money lenders only care whether the deal on offer is an attractive one. If the value of the home is right for the money, these lenders are likely to bite, using the property as collateral for the loan.
They still have to earn money on this kind of deal if they have to take the property due to non-payment, which is why the value of the property versus the amount borrowed is so critical.
Private money lenders are another option similar to hard money lenders. While hard money lenders tend to be real estate professionals, private money lenders are anyone with money to invest.
2. Real Estate Investment Trusts
Investors who want to invest in real estate but don’t necessarily want all the risk and work associated with it may want to consider buying into real estate investment trusts. REITs own and manage properties, and those that are publicly traded offer the added benefit of attractive dividend yields.
Publicly traded REITs are required to pay 90% of their taxable income to shareholders, generally via dividends. As a result, they offer a solid income stream without the extra work associated with being a landlord.
Even people with bad credit can easily invest in publicly traded REITs via an online stock brokerage account.
3. House Hacking
If buying an income property is at one end of the spectrum in terms of physical involvement and REITs are on the other, house hacking falls somewhere in the middle. With house hacking, you’re simply renting out a room or other portion of the home you already live in.
This strategy may require zero investment upfront, depending on the state of the property and whether any improvements or modifications are necessary. House hacking can be used to reduce your living expenses or as the first step toward having an active real estate investment portfolio.
House hacking can be as simple as renting out a room in your home or taking on roommates. On the other hand, it can also be as complex as building an extra suite onto your home or even purchasing a multi-family home. House hacking can also involve purchasing an older home in need of repairs and updates and living in it while you renovate it. So, you can sell it for more than what you put into it.
The rise of crowdfunding has also created new opportunities for would-be real estate investors with bad credit. Some crowdfunded real estate investments are only for accredited investors, but others may be open to investors with bad credit.
Low account minimums are making it easier than ever before for investors with bad credit to secure a slice of the real estate pie for themselves. Crowdfunded real estate options are typically available online and may cover anything from a shopping mall or other large building to a group of apartment buildings or other properties.
As with any online investment options investors are advised to do their due diligence before investing in any of them.
5. Seller Financing
Finally, some investors may be able to purchase an investment property via seller financing. This option is only available on properties that are fully owned by the seller with no lien. Sellers who need cash quickly also won’t be willing to finance your purchase of their property.
When sellers finance someone’s purchase of their property, they act as the bank, essentially providing a mortgage to the purchaser. Credit isn’t usually a factor in seller financing, and the closing costs are usually low. However, you will be subject to the terms set by the seller, who may or may not offer flexibility.
Seller financing can also be attractive for sellers. It gives them a steady income stream instead of a one-time cash infusion. Similar to a hard money loan, the property acts as collateral in a seller-financing deal.
Fixing Your Credit
While investing in real estate with no money and bad credit is an option, it’s always best to take steps to improve your credit as much as possible. Simply paying all your bills and loans on time goes a long way toward improving your credit rating. Also, you can have credit cards and use them regularly but pay them off at the end of every month.
If your credit is so bad that you can’t get a regular credit card, a secured credit might be an option. Even if you aren’t paying your credit cards off at the end of every month, simply reducing your overall debt balance can have a profound impact on your credit rating. Additionally, your credit rating takes a hit every time you apply for new credit, even if it’s a loan you don’t end up following through on.
You won’t be able to improve your credit score overnight, but by taking small steps each month, you can make a positive impact on your rating. And if you do start to see steady returns on your real estate investments, you might consider using the income you earn on that investment to reduce your debt balance.
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