HMW #117: Can I buy real estate with bad credit?Aug 30, 2023
Read Time: 5.5 minutes
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If you have bad credit, do you have wait to invest in real esate? Absolutely not.
Does bad credit makes things a little more challenging for you to buy real estate? Of course!
But that's the way the world works. If you have a ton of money and excellent credit, then you operate on easy mode. That's boring! For the rest of us, we love overcoming obstacles and welcome all challenges big and small. Sure, we may have no other choice, but let's accept that bad credit makes things a little more interesting for a real estate investor.
No harm in some positive spin! It can be a real estate investor's superpower at times.
First things first:
Good credit helps, but is not a necessity.
No doubt that your credit, good or bad, will affect both:
- The loan products available to you
- The interest rates charged to you
And having people loan you money to buy real estate is usually the way it works. As you know, the most successful way to make good positive cash flow is have very low rates with the best loan products too. But most people don't start there, you work your way up the ladder to easy mode over time. Investors with poor credit must pay their dues.
Perfect! It's good to know where you stand at all times.
So let's dig in. How can one invest in real estate with bad credit? Let's run down 5 different options for you:
Option 1: Use Seller Financing
Did you know sellers can be the mortgage lender? Yes, this is called seller financing and you can negotiate any set of terms for down payment, interest rate, pay back period, and more. (In HMW #100, I cover how to find seller financing deals.)
Yes, an additional step and extra effort is involved to find deals open to seller financing, but having bought a dozen seller-financed deals before, my (Alan's) credit was never run by the seller in each case. They look more kindly to income and experience, I've found. But every seller is different.
Option 2: Find a complementary investment partner
Also find partners that have complementary skillsets and and non-complementary weaknesses. If you have your plumbing license, partner with an electrician. If you have tremendous deal flow, find a big money partner. If you have bad credit, find someone with good credit. A good team is a balancing act and you don't need everyone to have the same set of skills to get deals done.
Option 3: Invest in commercial real estate
Residential mortgages on properties 4 units or fewer are more focused on the buyer's finances and credit score. For commercial properties of 5 units or more, lenders will underwrite more on the deal's finances (the property's NOI to be exact). Sure, your credit matters, but just not as much.
Commercial investing can be a learning curve for newbies and it's not as easy as residential but just know this is the place many bad-credit investors live because they may have no other choice.
Option 4: Use Hard Money or Private Money
Hard money lenders are companies that invest like banks, but are not banks (i.e - they only lend and don't have deposits or a brick and mortar location.) Private money are the rich people looking to lend for a good return on their money. Both of these businesses exist to serve one thing: lend to people who can't get traditional loans. In exchange, they charge a higher interest rate and you are okay with that as it allows you to invest in real estate without months or years of credit repair.
Option 5: Grants, government programs, and more
People have bad credit. People have low income. And people need a place to live. All these things mean with enough online researching and good timing, you can take opportunities to get down payment assistance in certain counties at certain times in order to buy properties. These programs mainly serve primary home buyers rather than investors, but starting with a purchase for yourself and building your credit on your primary is a great way to repair your credit and prep you for better deals and rates on your next purchase.
Dude, I hear you! There is only so much I can put in a blog post. We do have offer courses, including The BROKE Method to real estate investing that you should check out. It covers over 30 different ways to buy real estate with no money, which I've used to acquire over $30 million of real estate. If you want a real deep dive, then that's the product for you.
Buy for now, don't give up. We all have obstacles to overcome and bad credit is one of the easiest! We do recommend always doing what is possible to repair your credit, improve your credit score, and use the best loan products available. So eventually having good credit should be your goal at all times to have support a long successful career in real estate investing!
- Bad credit makes things harder, but not impossible
- Creativity and extra work going to be required, and that's okay
- Higher rates and worse terms are expected for bad credit borrowers
- Options of seller financing or finding complementary partners goes a long way
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