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You can invest in real estate if you have a low credit score. However, getting a conventional mortgage to buy a rental property can be more difficult and expensive without good credit. If you still wish to pursue real estate investment, you may need to look for alternative loans and arrangements to make it happen—or investigate real estate investment options that don't require you to take out a loan.
Should You Invest in Real Estate With Bad Credit?
Your credit can certainly be a factor in deciding whether investing in real estate is a good idea right now. Additionally, your debt-to-income ratio (DTI) and how much you can afford for a down payment can be major factors in your loan options.
Regardless of your creditworthiness, also consider the pros and cons of a particular investment property and real estate investing overall. While real estate is sometimes touted as a way to make a passive income, maintaining a property and dealing with tenants can be a lot of work. And as prior housing real estate downturns have shown, real estate isn't necessarily a guaranteed investment.
If you improve your credit score and overall creditworthiness before taking on an additional loan, you may be able to qualify for more favorable rates and terms. You'll also be better positioned to refinance or take out additional loans if needed.
Buying an Investment Property With Poor Credit
If your credit is so low that you can't qualify for a conventional mortgage to buy an investment property, you may need to turn to alternative types of loans or arrangements. You could:
Ask About Seller Financing
If the current owner of a property owns it outright, they might be willing to finance the sale themselves. While your credit won't necessarily be as important of a factor, you may have to agree to a higher interest rate or make a large down payment to secure the deal. You may also have to agree to the seller's demands, and if you don't follow through with your payments, they may be able to take back the property.
Find an Investment Partner
Rather than trying to finance the entire deal on your own, you could work with one (or several) partners and purchase an investment property together. However, you'll need to bring something to the table, such as capital to invest or the ability to help repair and maintain the property.
Apply for a Hard Money Loan
Rather than turning to traditional mortgage lenders, you may be able to borrow money with a hard money loan. These are secured loans with rates and terms that depend on the investment potential of the property rather than the borrower's creditworthiness. However, hard money loans often have high interest rates and short payment terms, and they're generally best for real estate investors who plan on buying and flipping a home rather than purchasing a rental property.
Ask for a Private Money Loan
A private money loan is a loan from friends, family members or other acquaintances who lend you money directly. These could be somewhat informal loans, although you'll likely still want to have an attorney help you create or review a loan document. While the loan could be easy to get from a credit perspective, make sure everyone's expectations are in line and consider how it could affect your relationships if you aren't able to repay the money.
Consider a Government-Backed Loan
Government-backed mortgage loans, such as FHA and VA loans, may have lower credit and down payment requirements than conventional loans. While you may need to use the loan to purchase your primary residence, you can buy a multiunit building, live in one unit and rent out the others. There are multifamily FHA loans, but even the standard FHA and VA loans let you buy a property that has up to four units.
Alternative Ways to Invest in Real Estate With Bad Credit
Rather than buying an investment property directly, you could try alternative ways to make money from real estate. These options don't necessarily require a credit check, and your credit score might not impact your options or returns.
1. Buy Shares in a REIT
A real estate investment trust (REIT) is a company that buys real estate and passes on rental profits to its investors. You can purchase shares in a REIT similarly to how you buy stocks or mutual funds and may collect monthly, quarterly or annual dividends. However, like stocks, the price per share could change and impact your overall investment returns.
2. Rent a Room
If you own your home or are allowed to sublet your rental, you could try to make money by getting a roommate and collecting rent each month. You could also look into using your property as a short-term rental. Or, depending on where you live, you might even be able to make money renting out your entire place and either stay with a friend or at a nearby hotel for a few nights.
3. Invest in Crowdfunding Real Estate Offers
Some people source deals and offer private real estate investments using a crowdfunding model. You can review investments online and invest in individual buildings or funds. However, some of these sites or investment options are only available to accredited investors.
How to Improve Your Credit Before Investing in Real Estate
If you want to purchase an investment property on your own, but your credit isn't in great shape, you could focus on improving your credit while saving up for a down payment. It could take months or years depending on what's impacting your credit, but try to:
- Make all your loan and bill payments on time.
- Pay down balances on credit cards and personal lines of credit.
- Review your credit reports for errors.
- Use Experian Boost®ø to add positive payment information to your credit file.
Even when your credit isn't the most important factor in a decision, it could still impact your options. For example, a hard money lender or investment partner might want to review your credit before making a decision or setting the terms of your loan. While you might be able to close a deal today, working on your credit could still be a good idea for your financial future.
Monitor Your Credit for Free
Keeping an eye on your credit report and score is easy with free credit monitoring. Experian's program comes with real-time alerts, FICO® Score☉ tracking and online disputes. You can also see what's impacting your credit scores the most and get matched with credit card and loan offers based on your credit profile.