The U.S. housing market gained a value of around $2.5 trillion in the year 2020, more than any year since 2005. The strong demand and record low mortgage rates were the major reasons behind this spike in the market. This could be the golden period for investors looking to start investing in real estate.
A low or poor credit score can become an obstacle for many investors to purchase a real estate investment property. So, does that mean you should drop the idea of investing? NO!
There are plenty of other options for investors to start investing in real estate despite a less than perfect credit score. Using the following investment strategies, investors can build capital through alternative funding sources and have better investment opportunities.
Real Estate Wholesaling
If you want to invest in real estate but can’t build the required capital because of a slightly lower credit score then real estate wholesaling can be a great option for you. Real estate wholesaling allows you to make significant profits without having to purchase an investment property.
Real estate wholesaling is a whole different game from flipping houses. You have to put your marketing skills to the test and communicate effectively with everyone. Knowing how to make connections as a real estate investor will help you ace the game of real estate wholesaling.
How Does Real Estate Wholesaling Work?
There’s no investment or funds required to start wholesaling so your credit score is insignificant here. There are mainly three parties involved in real estate wholesaling: a seller, a wholesaler, and a buyer. Let’s have a look at the following example to get a better view of how wholesaling works:
- You find a seller who is willing to sell his property at a discounted price. After some negotiations, you form a contract with the seller to purchase the property at a price of $90,000 and with the terms agreed upon.
- Then making the most of your networking skills find a potential buyer or investor looking to purchase a property to flip or invest in a rental property.
- Using your marketing skills you convince the buyer to purchase the property at a price of $100,000 while assuming all the terms specified in the purchase contract.
- Now you take the $100,000 from the buyer and provide them the ownership of the house. Give $90,000 to the seller as per the purchase contract and the remaining amount of $10,000 is your net profit from the deal.
Investors can earn anywhere from $5000 to $30000 with real estate wholesaling. The key here is to build capital through smaller profit margins.
Go for Hard Money Loans
Asset-based hard money loans are a great way to start investing in real estate. Hard money lenders look past your credit score and provide loans based on the after-repair value of the house on offer as collateral.
Hard money loans are short-term loans lasting for 6 months and up to 2 years. That is ideal for an investor looking for funds to purchase an investment property, renovate it, and flip it for a profit in a shorter time frame.
The interest rate on hard money loans is higher compared to conventional loans because of the higher risk involved in real estate investing. The typical interest rates on hard money loans range from 7% to 15%.
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As the property is the only protection on default, hard money lenders require you to pay anywhere from 10% to 50% of the loan amount on a down payment. The down payment is calculated on the Loan-to-value (LTV) ratio of the property. It may vary by lender and the appraised value of the property.
For example, if you are willing to purchase a property worth $100,000 then a hard money lender will offer a 90% LTV ratio. That means the total loan amount will be $90,000 and you’ll have to pay the remaining $10,000 towards the down payment.
Benefits of Using Hard Money Loans for Real Estate Investing
1. Simple Underwriting and Less Documentation
Unlike traditional lenders’ underwriting process, hard money lenders don’t look for your credit score, credit history, or debts. An asset is a primary qualification for hard money loans. That makes it easily accessible to investors with a not-so-perfect credit score.
Documents like a purchase contract, two forms of identification, a preliminary title report, proof of funds, and insurance are enough to obtain a hard money loan.
2. Fast Loan Processing and Approval
Thanks to the simplified verification process, investors can avail a hard money loan within a few days or a week. That allows you to build capital in a short time to seize a lucrative investment opportunity.
3. Flexible Terms and Conditions
Hard money loans are provided by individuals or a group of private investors and they don’t conform to any guideline, which means you can avail yourself flexible terms and conditions. You can negotiate with lenders on loan terms, repayment schedule, and other conditions of the loan.
Approach Private Money Lenders
Another option is to approach private money lenders for funding your real estate investment project. Private money lenders can be your friends, relatives, business partner, or anyone looking for a return on their investment.
A strong investment plan and the potential returns are what private money lenders look for while lending you. So it doesn’t matter if you have a poor credit score, private money lenders can still lend you.
Private money lenders don’t follow specific guidelines or rules and regulations. They provide you a loan with their own money, so you can negotiate on the terms like interest rate, or repayment period with the lender. The key here is to compensate well with the lender to get the best deal.
When you have bad credit, you’ll have to put effort into convincing a private money lender to provide you a loan. You can form a partnership with the private money lender where the profit can be shared in equal parts, agree to pay them a specific interest rate for a set period, or offer to pay loan points to seal the deal.
Opt for Seller Financing
Seller financing is also known as owner financing or purchase-money mortgage. It allows you to sign a mortgage agreement with the seller rather than applying for a loan to a financial institution.
From a seller’s perspective, financing your purchase makes it convenient to sell the house. This also allows a seller to earn monthly payments for offering to finance your purchase.
A buyer typically has to sign a promissory note to avail seller financing. The promissory note states the interest rate, repayment schedules, and details regarding default. These types of loans are generally amortized over 30-years with a balloon payment at the end of the loan term.
Benefits of Using the Seller Financing
- A seller will finance your purchase ignoring the fact that you’ve been turned down by a bank or other traditional lenders. That makes it a great alternative to bank mortgages.
- There are no credit checks or income verifications involved in the loan process. A buyer can make the most of this strategy to start investing in real estate despite a low credit score.
- The terms of the loan are flexible and set between the buyer and the seller. So the interest rate, down payment, or monthly payments have room for negotiation.
- As there are no verifications, seller-financed loans can be obtained quickly. The closing process of seller financing is relatively cheaper.
The great thing about real estate investing is that it doesn’t need you to have deep pockets or a perfect credit score to start with. Everyone has an equal opportunity to build their wealth from investing in real estate.
Having a less-than-perfect credit score cannot stop you from purchasing an investment property. You can opt for alternative funding sources to make your first purchase and start investing in real estate.
Alternative funding sources are more flexible with their loan terms and can be more convenient for an investor in terms of repayment.
Your knowledge about the field, marketing skills, effective communication, and the ability to make connections will open doors to more investment opportunities.
Abhi Golhar is a nationally syndicated media host, entrepreneur, and sought-after speaker with a large national following and wealth of resources to share in the Real Estate investment industry. He has built and manages a sizable, profitable investment portfolio across the Southeast US, with expertise in benchmark markets.